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A Reverse Mortgage Counseling Session Overview
HECM COUNSELING SESSION
Tuesday, May 19, 2009
Performed by Tim Robbins, Director of Counseling - CCCS of Montana
INTRODUCTION:
Counselor: Alright, James, do we have you?
CLIENT: yes you have
Counselor: Alright very good we have Darryl on the line that’s going to be listening in and observing as well
CLIENT: You bet
Darryl: Hello
Counselor: Alright so we will go ahead and get started here. James, I just wanted to kind of give you a little background on what my role is and why we are doing a reverse mortgage counseling session and then we will go ahead and give you an overview and get started on the counsel. I work for a HUD approved housing counseling agency and I do not work for any lenders or anything like that. I am working for a housing counseling agency when it comes to reverse mortgage counseling I am sort of an independent third party. My job is to provide information for you about reverse mortgages and answer any questions you may have but I am definitely not here to tell you what to do, to tell you that it is a good idea or a bad idea or any of the other. I am just here to kind of answer your questions and provide information. So, does that make sense?
CLIENT: Yes I understand that.
COST OF COUNSELING
Counselor: Ok. Perfect. One of the things I want to cover just right at the beginning, James, is you should have been informed there is a cost for the counseling session.
CLIENT: Yes.
Counselor: Ok. The cost is $125 and you don’t have to pay that up front. You are welcome to finance it into your loan costs.
CLIENT: ok.
Counselor: But you may actually qualify for a fee waiver so I wanted to ask you two questions on that as well. With your current mortgage are you behind on that at all?
CLIENT: No I am not.
Counselor: Ok. And are you in the process of filing for bankruptcy?
CLIENT: No I am not.
Counselor: ok. Those are the two questions we go through for a waiver. You don’t qualify for that so we will go ahead and anticipate that being paid out of your loan costs.
CLIENT: ok.
Counselor: One thing on that James is if you do not end up going through with the loan, you are ultimately responsible for the cost of counseling, that $125. And so what we would probably do is send you a letter in about 90 days just to follow up and see where you are at in the process and if you haven’t elected to go through with the loan then we will work with you directly to pay that cost.
CLIENT: Alright.
Counselor: so any questions about that?
CLIENT: Not a bit.
Counselor: Ok. Very good. What we are going to cover today is we are going to go over some basics about what a reverse mortgage is what makes it different than say a regular mortgage and we are going to go through a few other things that I am required to review with you as a counselor. We are also going to look at a couple of different reverse mortgage products that are out there and available to see what’s different between those because they are not all the same and we are also going to look at potential options and alternatives. That’s one of the things that I am tasked with as a counselor is to review any options or alternatives that are out there and available for you as well. So as part of that I am required to run through a simple budget with you to get a snap shot of where you are financially and that helps me later down the road to look at options and alternatives and some things that may be a good option for you.
CLIENT: Alright.
VERIFY CLIENT INFORMATION
Counselor: So first thing, before we jump into the budget, let me do some housekeeping and make sure I have the right information for you. So your full name is James *. ****. Is that correct?
CLIENT: right.
Counselor: Ok. I’ve got your address as 623 *****. And is that, how do I say that?
CLIENT: *****, Washington.
Counselor: *****, Washington. Alright. And James are you the only who’s on the title of the home?
CLIENT: Uh, I am now because the wife deceased April 18th.
Counselor: Oh, I am sorry to hear that.
CLIENT: So when I called up uh, the credit union that had the contract I told them, so they put me as primary.
Counselor: Ok. So at this point you are the only one on title?
CLIENT: Yes.
Counselor: Ok. Alright, well I think that; let me go through a couple of other things. Again we gather some demographic information, just a few things, mainly for HUD purposes on this. I got to ask you just a couple of questions. I have your date of birth as **/**/**.
CLIENT: Right.
Counselor: And what’s the highest education level you got to in school?
CLIENT: Uh, I got my GED in the navy.
Counselor: Oh. Very good. Very good. Did you spend a lot of time in the navy?
CLIENT: Oh, I only spent seven years.
Counselor: Oh yeah. Alright. And what is or what do you consider your ethnicity? For example Caucasian, African American. What would you consider to be your ethnicity or your race?
CLIENT: Oh, Ah, Caucasian.
Counselor: Ok. Thank you. Alright and you are the only one in your household, correct?
CLIENT: Yes, I am.
Counselor: Ok. Alright. Those are our tough questions there that we had to go through. Pretty easy, so.
CLIENT: Yeah.
BUDGET
Counselor: Alright. Let’s get on to the budget here, and the first thing I need to look at is get an idea of what income you have coming in. So James, what are your sources of income right now?
CLIENT: Well, right now I have a national pension through the Pipefitters and Plumbers Union,
Counselor: Ok.
CLIENT: I have a state pension from same,
Counselor: Alright.
CLIENT: And I have social security.
Counselor: Ok. Let’s start with the first pension and we will work this from a monthly basis. How much do you receive from that first pension on a monthly basis?
CLIENT: $483.63.
Counselor: $483.63. And from the second pension?
CLIENT: Uh, $281.00.
Counselor: $281.00. Alright. And then you said social security?
CLIENT: Yes, uh, $1046.00.
Counselor: $1046.00. Does that cover all sources of income for you then?
CLIENT: Yes that covers it all.
Counselor: Alright. I am going to add those up real quick. Give me one second. Alright, so on a monthly basis it’s about $1800.00 roughly that’s coming in.
CLIENT: Yes I figured a little bit…it was around $1900.00
Counselor: Around $1900.00, somewhere in there?
CLIENT: Yeah.
Counselor: Ok. We will work with that as we run through a simple budget here. Let me plug in these numbers. I am working on a, our system here just to make sure we get all the information and things put in correctly, so.
CLIENT: Ok.
Counselor: Ok. Let’s move on and we will go through the budget then. We’re not going to get real detailed on this but we will try to get an idea of what kind of expenses you have on a monthly basis.
CLIENT: Uh huh.
Counselor: Now, I’m showing that on your current mortgage that you have, that you still have a balance on that, and looks like the balance on that is around $156, or close to $157k?
Counselor: Yeah, it’s at $156,898 and some odd cents.
Counselor: Ok. And then the property value itself is at about $300k, roughly?
CLIENT: Roughly, yes.
Counselor: Ok. On that mortgage, if we start with that from a budget standpoint what’s your current payment on that, on a monthly basis?
CLIENT: My current payment right now is $1477.00 a month.
Counselor: $1477.00 a month. Ok. So it sounds like that’s probably where most of your income is going each month is to that payment.
CLIENT: Yeah, with the wife here, we split it down the middle.
Counselor: I see, I see. So is that one of the things that got you interested in a reverse mortgage is that loss, for lack of a better term, of a second income there?
CLIENT: Right, because otherwise I wouldn’t ever be able to afford this house.
Counselor: Ok. Alright. We’ll talk about that a little bit more here after we run through the budget as well.
CLIENT: ok.
Counselor: And you guys just have one mortgage on that? No second or home equity loans on that?
CLIENT: No
Counselor: Ok. And your taxes and insurance are they paid from your current mortgage right now?
CLIENT: Yes they are.
Counselor: Ok. Let’s run through a couple of standard bills that you may have each month. What do you pay for say gas and electricity each month?
CLIENT: Well, um, my electricity runs $155 a month.
Counselor: ok.
CLIENT: And my gas, do you mean transportation gas or heating gas?
Counselor: Heating gas.
CLIENT: Uh, I use very little. I only use to, for cooking.
Counselor: Ok. So do you figure if we combine gas and electricity you’re around somewhere say $175 a month, something like that?
CLIENT: Oh, I wouldn’t even put it that high. I’d put it around $165.
Counselor: Ok. We’ll do that. Alright, how about phone bill? Do you have a regular phone and a cell phone by chance?
CLIENT: Yes I have my cell phone and a regular phone.
Counselor: Alright. What is your regular phone bill run each month?
CLIENT: It runs around $42 each month.
Counselor: Ok and how about the cell phone?
CLIENT: Uh, right now I got a new one I believe is $49 a month.
Counselor: Ok. Alright. The next typical bill we have in a household is water, sewer and trash. What do you figure that runs you on a monthly basis?
CLIENT: Oh, I don’t pay that.
Counselor: Ok, is that, you just don’t have to pay that bill, is that not something…
CLIENT: Oh no, I’m on my own water system and I have a septic system.
Counselor: Oh, very good. That works out pretty well. And then there’s no trash costs for you as well?
CLIENT: I have a, I have my trash cost is picked up; it’s uh $26 and some odd cents every two months.
Counselor: Ok. Alright. That’s pretty reasonable, pretty lucky that you are on your own water system there. I wish I could go for that.
CLIENT: Yeah.
Counselor: Aright. On a monthly basis what do you figure you spend on groceries and then maybe dining out each month?
CLIENT: Well, I, we never really did eat out very much but I’d say now my groceries probably hit me around maybe $100 a month because I don’t eat hardly at all anymore.
Counselor: Around $100 a month?
CLIENT: Right.
Counselor: Ok. And then does that also include, you know, supplies and personal care, um, you know soaps, shampoos, that kind of things that you would need?
CLIENT: Well I don’t know how we go about that because we always bought quite a supply all the time at one of the stores Costco, so…
Counselor: Yeah I imagine living on your own it’s probably fairly inexpensive as well.
CLIENT: Rright.
Counselor: Well we can put in there may be about $15 a month do you figure?
CLIENT: I would say that would be just about right.
COUNSELOR: Ok. I’m a pretty low maintenance guy too so I figured that’s about where I’m at. And then as far as the laundry expense, do you, are you able to do the wash at home or do you have to…
CLIENT: right I do that at home.
COUNSELOR: Ok so that’s probably just a couple of dollars in expense as well each month?
CLIENT: Right.
COUNSELOR: ok. Do you have any pets or anything like that, James?
CLIENT: No we don’t
COUNSELOR: Ok. Um, how about, let’s talk about vehicles. Do you have any car payments?
CLIENT: I have one car payment that is $271.10 a month.
COUNSELOR: Ok. Do you know how much you still owe on that one?
CLIENT: Oh, I would say, I don’t know, between $7-8k.
COUNSELOR: Ok. Alright. I will just put a note of that in here. What I am going to do, is I will actually send you a copy of this budget we run through too just so you have it for your records and I don’t know if you…Do you track your expenses like this? I mean it sounds like you know this
CLIENT: Yes. I keep all my receipts.
COUNSELOR: Sounds like it. I mean you know them down to the penny it sounds like you do a pretty good job with this.
CLEINT: Pretty close.
COUNSELOR: Alright so we just have the one vehicle payment?
CLIENT: That’s all.
COUSNELOR: Ok. And what does it take to license that?
CLIENT: This past year was $75.75.
COUNSELOR: Ok. That only actually comes out to about $6.25 a month so will round her there.
CLIENT: Right.
COUNSELOR: And how about insurance for the vehicle?
CLIENT: I have that through State Farm.
COUNSELOR: Ok. And what does that run you say on a, do you pay every 6 months or….
CLIENT: I pay every month. It’s around, runs around $153.00.
COUNSELOR: Ok. About $153?
CLIENT: Yes that’s for everything. Homeowners and all.
COUNSLOER: Ok that covers everything then?
CLIENT: yeah.
COUNSELOR: But that homeowners insurance is coming out of mortgage payment, correct?
CIENT: No I pay for that.
COUSNELOR: Oh. Ok that’s good to know. Alright I will put a note on that in there as well. How about fuel for the vehicle? What do you figure you are putting in the gas tank each month?
CLIENT: Oh I figure roughly anywhere from $50-60 a month.
COUSNELOR: Ok. Not a lot of driving then?
CLIENT: No not too much.
COUNSELOR: Ok. Do you have much for maintenance costs on the vehicle?
CLIENT: No I take it in every 6k miles to have it serviced and that’s all.
COUNSLOR: Ok
CLIENT: It usually runs me around $55-58.
COUNSELOR: Ok we’ll just put in maybe say about $15 a month for an on-going cost then.
CLIENT: Right.
COUNSELOR: So that will give us an idea there. Alright. Do you have any other vehicles that you have expenses on for insurance or licensing at all or just the one?
CLIENT: I have a 1989 K-3500 Chevrolet.
COUNSELOR: Ok.
CLIENT: And I have a 1990 34’ Pace Arrow motor home.
COUNSELOR: Alright, so do you keep those ones licensed as well?
CLIENT: I keep them licensed, yes.
COUNSELOR: Alright. What does it cost you between the two of the each year on that?
CLIENT: well let’s see, I wish I would have known you would ask that I could have had this out in front for you.
COUSNELOR: Estimates work pretty well for us too, so.
CLIENT: Does it? Ok.
COUSNELOR: Yes.
CLIENT: My motor home I think was $105.
COUSNELRO: Ok.
CLIENT: And my truck was only, I think it was pretty close to $80.
COUNSELOOR: I know when they get older they are not as much to register.
CLIENT: No.
COUNSELOR: Alright. And those are all paid off free and clear it sounds like.
CLIENT: Yes they are all free and clear.
COUNSELOR: Alright. We’ll add that into the registration cost there. The next thing we are going to look at…is there any ongoing maintenance costs going on with those vehicles that you figure you have?
CLIENT: No.
Counselor: Ok.
COUNSELOR: Alright. Let’s go down here a little bit farther, um, another category I like to definitely cover is health care costs.
CLIENT: Alright.
COUNSELOR: Do you have any insurance or co-pay costs that you incur on a regular basis?
CLIENT: No. we are on Medicare and Blue Cross Blue Shield.
COUNSELOR: Ok. And does that cover everything fairly well for you?
CLIENT: Yes it does.
COUNSELOR: Ok. Do you, with the BCBS then, you are paying for that insurance.
CLIENT: My wife did through federal.
COUNSELOR: So is that a cost that you will continue to have?
CLIENT: I am in the process of trying to find out if I get to carry that through or not, otherwise I will have to go and see what it would cost me to carry this because I am very satisfied with what they are doing.
COUSNELOR: Do you have any prescription costs on a regular basis, James?
CLIENT: Oh, heavens. You got me now.
COUNSELOR: Yeah, I know the right questions, right?
CLIENT: Yeah hang on I got to turn this thing off here.
COUSNELOR: Sure no problem
CLIENT: I would say probably, oh heavens it’s hard to tell because I get my prescriptions 3 months at a time.
COUNSELOR: We can take that and just divide it by 3. What do you think it costs you every 3 months?
CLIENT: Every 3 months I would say maybe $150, $175.
COUSNELOR: Ok. I am going to use the high amount just in case, so I will use that high estimate of $175.
CLEINT: OK... yeah.
COUNSELOR: So every month you figure about $60 for prescription costs?
CLIENT: Right in there yeah
COUSNELOR: Ok. So you are just paying your portion of that.
CLIENT: Just paying my portion, yes.
COUNSELOR: Ok. Alright, any other health care costs that you know you have routinely?
CLIENT: no just my dentist bill.
COUN SLEOR: Ok. Is that one, is that very significant or is that just here and there?
CLIENT: Well every 3 months…It varies. It runs anywhere from $170-190.
COUSNELOR: Ok. We will put that one in there as well. We’ll put it under the health care costs.
CLIENT: Yeah.
COUNSELOR: We will estimate that one at $57, somewhere in there or so.
CLIENT: Yeah.
COUNSELOR: Alright. Do you have any other tax expenses? Are you paying on any back taxes or anything like that?
CLIENT: No I am not.
COUNSELOR: Ok. Any cable, satellite, or internet costs for you?
CLIENT: Oh, I just got my satellite.
COUNSELOR: Ok. What does that run you each month?
CLIENT: It runs me around $85 a month.
COUNSELOR: Ok. Do you make any donations or tithe on a regular basis?
CLIENT: Well, just March of Dimes and those.
Counselor: Ok, kind of once a year type thing.
CLIENT: Yes.
COUSENLOR: Ok. We will go ahead and leave that off the monthly one for now. Are there any other costs that you know you have on a monthly basis that we haven’t talked about yet?
CLIENT: No I don’t think there is any.
COUNSELOR: Ok. I am just going to kind of recap where we are at on the budget. If we start out with income at about $1800.00-$1900.00 a month in there, your living expenses right now are close to about $2600.00 per month, so that puts you in the hole for about $800, which I am sure you have felt in the last month since losing your wife, so does that sound pretty accurate to you? You feel like you are not able to keep up with it at this point?
CLIENT: Well, uh, with uh, I wished I would have kept that paper. I know I threw it away, but I had my expenses, what I paid out every month. I didn’t include everything else and that left me around $1000 per month after I paid off $800 and some dollars to my regular bills. So the others would be consequential, just whenever I had, you know. It makes a difference.
COUNSELOR: Ok. Yeah, these other ones are periodic expenses because you don’t write the check each month but you know every couple of months you will probably be paying for them. That’s one of the things we like to include in a monthly basis otherwise those expenses have a tendency to sneak up you.
CLIENT: Ok.
COUNSELOR: So this is what I am showing right now is with your current income, if we include those periodic expenses that you are not going to have quite enough income to meet those monthly expenses. Do you have some savings or something you are working off of right now?
CLIENT: Well no, I have started a savings account but I only have around $1000 in it.
COUNSELOR: Ok. Alright. Do you have any retirement accounts or anything like that that you draw from outside of your pension?
CLIENT: No.
COUSELOR: Ok. Just taking that into consideration and down the road here we will talk about options and alternatives.
CLIENT: Right.
PROVIDE OVERVIEW
COUNSELOR: Let’s switch gears here and talk a little bit about reverse mortgages. And I am going to ask you a question now. Tell me what you know about a reverse mortgage.
CLIENT: Well the only thing I know is just what one of the ladies told me.
COUNSELOR: ok.
CLIENT: You know it’s about a…they buy off the equity and put it in and I can leave it in there and I can draw if I need it, you know down the line.
COUNSELOR: Sure. Sure. Sounds like you guys talked a little bit about payment options there.
CLIENT: Year. And that’s about the full extent of what I found out so far and they said they don’t own the home and I don’t understand that but I have a meeting with the lady this weekend to explain things for me.
COUNSELOR: ok. Alight. And I will try to answer some of the questions and I can share with you what I know about those as well.
DESCRIBING REVERSE MORTGAGE
COUNSELOR: James, the basic idea behind a reverse mortgage is that it’s a loan against the value of your home.
CLIENT: Right.
COUNSELOR: And what makes it different from say your current mortgage is that you don’t have to pay this one back until a future date, typically until you leave the residence permanently.
CLIENT: right.
COUNSELOR: I’ve had people kind of joke with me and say “I can leave the residence head first or feet first, it sounds like.” The way that goes, is it’s based on the last remaining borrower in the home and so if you passed away or you moved and you left the residence permanently then at that point, the loan would become due and payable. What makes it a little bit different as well is there’s not a monthly payment. You know with your current mortgage, you are paying $1400 a month which means you’re gradually paying off your debt there. And so your debt is getting smaller and your equity is actually growing with a regular mortgage. But the reverse mortgage is a little bit different because you are actually borrowing money and you are not making payments on it so the amount you borrowed is growing with interest each month.
CLIENT: Right.
COUNSELOR: So your debt is actually getting a little bit bigger every month and the equity in your home is actually going down. So we call that a rising debt –falling equity relationship.
CLIENT: Right.
COUSNELOR: So any questions about that?
CLIENT: No.
COUNSELOR: Ok. One of the other features about a reverse mortgage that’s different from other mortgages is what we call a non-recourse limit. Now this is a feature that is in there to primarily protect you as a borrower, and what this says is if the loan balance grows to be more then what your home is actually worth at the time the loan is due and payable, you only have to pay back what your home is actually worth. So in theory, you know, if for some reason your loan grew to be $400k, but your house was still only worth $300k, you’re required to pay back the $300k. So that’s a protection in there. You typically will not see that situation but that’s a protection clause, that non-recourse limit that is built into these loans.
CLIENT: Alright.
COUNSELOR: Do you have any questions about that?
CLIENT: No I don’t.
COUNSELOR: Ok. Alright. So that’s a basic idea of how a reverse mortgage is different from a regular mortgage.
WHO QUALIFIES?
COUSNELOR: The other thing is that not that everybody can get a reverse mortgage. The question is who can get one? And they are specific to seniors, those who are 62 years old and older. And, so congratulations, you qualify on that one.
CLIENT: I am glad.
COUNSELOR: So, the other thing is there are a few other requirements as far as what properties are eligible and those things. The main thing is the home that you get the reverse mortgage loan on, it has to be your principle residence, which means you have to live there 6 months and one 1 day out of the year so at least 6 months of the year so, James is that the case in your home? You live there year-round?
CLIENT: Oh yes. Once in a while we took a trip but we live here 12 months out of the year.
COUNSELOR: Ok. So that’s your principle residence then. The other thing is that for the most part, just certain property types are eligible so is that a single family residence, just a standard home?
CLIENT: Yes.
COUNSELOR: Ok. And that’s the most common property type and that’s eligible. So those are the main characteristics as far as who can get one and which properties are eligible. One other characteristic of a reverse mortgage is that it has what’s called a first lien requirement which means a reverse mortgage wants to be the only lien on the home or the only loan against the home.
CLIENT: Right.
COUNSELOR: There‘s a few special exceptions, but primarily it’s that.
CLIENT: Right.
COUNSLOER: So one of the features of a reverse mortgage is it can pay off your existing mortgage on the home. And so, is that something that you have possibly discussed with your lender already?
CLIENT: No not yet. I have a meeting with her Saturday.
COUSNELOR: ok. Well this is something that you may want to jot down. I will send you some of this information as well but on a reverse mortgage, the proceeds that you actually get from the loan, if you have a mortgage on your home right now, the reverse mortgage will pay that off.
CLIENT: Right.
COUSNELOR: So it’s actually a requirement to pay that off and you are left with whatever leftover money is available to you.
CLIENT: ok.
COUNSLOR: So any questions about that part?
CLIENT: No
PAYMENT OPTIONS
COUSNELOR: Ok. We’ll actually go through some specific numbers right here in a minute as well. A Few things are how you can actually receive the payments as well. There’s a variety of different ways you can receive that money. But before I get there I want to back up. I got a bit ahead of myself a little bit. James, tell me a little bit about why you are considering a reverse mortgage? What got you interested in that?
CLIENT: Well, the first reason is that I would lose my home because I couldn’t afford to pay $1477 month. I only have a little over $5k now in my banking so this is one reason I looked into this it come out to look like it would be very satisfactory for me to do. I actually don’t want to sell the home. I want to live here as long as I can.
COUNSELOR: Yeah I can understand that definitely. So we will look at, have you, maybe I will ask you this question now, have you considered any other options or alternatives besides a reverse mortgage?
CLEINT: No I haven’t.
COUNSELOR: Ok. We will go through a few of those things and again it all depends on what your preferences are as well. It sounds like you are pretty set on staying in the home, that selling it and moving somewhere else is maybe not an option for you at this point.
CLIENT: It is not an option.
PAYMENTS
COUNSELOR: Ok. Alright, we will touch back on that, but let me go through the actual reverse mortgage and how you can receive the payments from it then. In your case, James, we are going to look at how much you can receive and then we will go through the payments. So your house has an estimated value of about $300k.
CLIENT: Right.
COUNSELOR: The lender is not going to lend you that full amount because immediately if they lent you the full amount and then the interest started being charged on that right there you would be upside down or behind in the situation. So what they are going to do is they are going to consider a couple of factors. The first thing is obviously how much is the house worth. Then they are going to look at your age and they will look at interest rates.
CLIENT: Right.
COUNSELOR: And based on those 3 factors, they will determine how much they will loan you and that’s called a principle limit so that’s the actual value of the loan. Now I actually have some estimated numbers here. These are not by any means hard and fast. To get the actual numbers if you do go through with this, you will want to talk to your lender for sure but I can at least give you an estimate of what to expect.
CLIENT: ok.
LOAN COMPARISONS
COUNSELOR: We will look at two different products. There are a couple of different reverse mortgages out there. One of them is an adjustable rate that fluctuates on a monthly basis so most of the reverse mortgages on the market James, are adjustable rates which means the amount of interest being charged on the loan can go up or down depending on what interest rates do. So this one fluctuates on a monthly basis. It starts out at a pretty low interest rate of about 3.7% is what we are showing right now.
CLIENT: Right.
Counselor: So based on that interest rate, your age and the home value, with this product you’re looking at a principle limit of about $234k. So that’s what the loan amount would actually be. Now that’s not what they are actually going pay you because the lender will need to take out their costs right up front.
CLIENT: Right.
COUNSELOR: So there are a few costs in there and one of those costs is the mortgage insurance. That is an insurance that’s actually required on these loans and its there to primarily protect you. That’s 2% of what your home is worth, so that amount comes out at $6k.
CLIENT: $6k, ok.
COUSNELOR: That’s the cost right off the top. The next thing we look at is an origination fee. And again that is a percentage of the loan amount or of the lending amount. Our estimate on that is about $5k. And then the next category of costs is these other costs. This is going to be things like a credit report, property inspection, your title search, and with some of these things, the actual appraisal itself. Again our rough estimate on those costs is in the neighborhood of about $2400.00.
CLIENT: ok.
COUNSELOR: so those are your actual upfront costs. And you don’t have to walk into your loan closing with your checkbook and pay those. They can just be financed into the loan itself.
CLIENT: Oh, good.
Counselor: Yeah, it makes it a little bit easier to swallow that way because these costs are quite a bit higher than what you typically see with a regular mortgage.
CLIENT: Right
COUNSELOR: So if we take that $234k we started with and we take those closing costs that are about $13,400, then we are now down to about $220,600, roughly. There’s one other element that they take and put to the side from a lending perspective for your monthly service fee. On these loans there is a monthly service fee for them that goes to pay for the servicing of the loan to make sure that you get your statements or get your payments or whatever it takes to actually service the loan. The monthly service fee on this one is about $35 a month. Now this is kind of an interesting thing that’s done, what they do is the lender will take the estimated value of all of those future monthly costs and they just put that lump sum to the side and they hold that back there, and every month they are going to take $35 out of that and add it to your loan balance. So the amount we are showing on that, it’s called a service set aside is about $4300.
CLIENT: Right.
Counselor: And that $4300 is still actually your money. They are just holding it back to pay that monthly cost.
CLIENT: Right.
COUSNELOR: In the event, you know, that you end up finishing up this loan say in 10 years and you still have some money left over in that service set aside, it goes back to you, back into the equity of your home, so. Any questions about that one?
CLIENT: No I’ve got it written down here so.
COUNSELOR: Ok. And I will send you a copy of all these numbers to kind of side by side so you can see them.
CLIENT: Alright, terrific.
COUSNELOR: I know it’s a little bit difficult over the phone to see those. So again kind of getting back to $220,600 after we had taken out the closing costs, and then if we take out that $4300 that we pulled off the top there, that’s going to leave us with about $216,300. So that’s what’s actually left that can go to pay off your existing mortgage. And then whatever is left over goes back to you.
CLIENT: Right.
COUNSELOR: So your existing mortgage was $156,898. The reverse mortgage would pay that off and our estimates which are again just rough estimates are showing that you would have about $59k left over.
CLEINT: Alright
COUSNELOR: That’s what’s actually left over that can come back to you in a couple of different payment options.
CLIENT: ok
COUNSELOR: Now that product that I talked about there, that specific loan, adjusts on a monthly basis. There are a few others that you may look into. One of them adjusts on an annual basis. So your interest rate rather than going up or down once a month can go up or down once a year.
CLIENT: Oh, I see.
COUNSELOR:Ttypically that one starts out at a higher interest rate. We are showing it starting out at just over 4%. The costs are about the same and when it comes down to the bottom, instead of about $59k you are left with about $53k. So you can see that the higher interest rate whittles away about how much money you can receive. That kind of gives you a side by side breakdown of between those two. Do you have any questions about the different types of reverse mortgages out there, James?
CLIENT: No I don’t.
COUSNELOR: alright, one thing to keep in mind because these are adjustable interest rates, there is a ceiling for how much they can actually go up and down over the life of your loan.
CLIENT: Right.
Counselor: the one that goes up and down on a monthly basis can never go up by more than 10%. So if we start out at 3.7%, it’s never going to go above 13.7%. So that gives you a little protection there. The 13.7% those are pretty high interest rates. It’s been a long time since we have seen anything like that.
CLIENT: Oh yeah.
COUNSELOR: The annual one can actually only go up by 5% over the loan and in any one year it can’t go up more than 2%.
CLIENT: only 2.
COUNSLOR: Yes. So those, if you look between the two products, as you consider it, those are some features you might want to compare between the two. Is one or the other sounding better to you at the moment?
CLIENT: No, this is fine.
COUNSELOR: ok. Alright. I was just curious there. Alright. So if we get back to how you get that leftover money there, if we go with that monthly product for example that had around $59k left over for you…
CLIENT: uh huh.
COUNSELOR: There are a few ways you can receive that money. You can take it all upfront as lump sum, or you can say you want certain amount of money each month for a given number of months that’s called a term payment. Or you can say I just want it to pay me a monthly amount for as long as it’s going to last and that’s called a tenor payment and that will actually last as long as you are in the home.
CLIENT: Right
COUS NELOR: The other payment option is a credit line which is a little bit different as well. The credit line itself, in my mind, functions similar to a bank account almost. That $59k that is available to you, James, sits there in a credit line and you just basically access it as you need it.
CLEINT: I see.
COUNSELOR: So that gives you a lot of flexibility there so you can take as much or almost as little as you want out of there basically as often as you want as long as it’s available to you.
CLIENT: Right. I see that.
COUSENLOR: So one of the other features of the credit line is it does not earn interest because it is still a loan, but it’s actually growing at the same interest rate charged on your loan. So if your interest rate on the loan is 3.7% your credit line growth rate is 3.7 %
Client: Right
Counselor: So that 59K that you can borrow or take out of that is actually growing a little bit each month for you.
Client: Ok
PAYING THE LOAN BACK:
Counselor: So that makes a nice option for you as well. So have you discussed anything with the lender at all yet about payment options for you?
Client: No I haven’t
COUNSELOR: Ok. Are any of those options sounding like they would fit your needs better than another?
CLIENT: Oh yeah
COUNSELOR: Okay which one is sounding good to you?
CLIENT: The credit line .
Counselor: The credit line?
Client: Yes that one sounds the best
Counselor: It’s pretty flexible that way.
Client: Yes
Counselor: You know a nice thing about that too is that money is not added to your loan until you actually borrow it.
Client: right
Counselor: So the 59K sitting in your credit line is not costing you anything yet. But when you start to borrow it’s then added to you loan balance.
Client: Right I understand that.
Counselor: That is a nice feature about those.
Client: Right
Counselor: So one of the other things that can protect you from is some of the tax consequences of a reverse mortgage. A lot of people would say well I would like to take my reverse mortgage and take all of that money up front. I am just going to put it in my bank account you know or I am going to invest it and then use those proceeds. There is nothing saying you can’t do that but there’s a few things you’d want to consider if you put it in your bank account. One thing is that you’ve actually borrowed that money already so they are going to start charging interest on it. It’s getting added to your loan balance. The other thing is whatever interest you would earn by putting it in a savings account becomes taxable.
Client: Uh Huh
Counselor: Now on the credit line side, which it sounds like you kind of like , it’s not taxable you know the interest that your credit line is growing at is not a taxable income. On the other side, the investment side, there’s usually costs that come along with investing. If you bought stocks, cds, mutual funds, whatever it may be, you usually have to pay your broker a fee for that.
Client: Right
Counselor: So there’s a cost and there is also risk involved. You might lose money on it and there is again the tax consequences of it on whatever you earn on that. Had you considered doing anything like that with the proceeds from it or were you just planning on using it as needed?
Client: No, I am just going to leave it on a creditline and I won’t use it unless I need any of it.
Counselor: Mmmhmm
Client: The way it looks right now with my income and everything, once I get squared away I can save money every month.
Counselor: Yeah, well once you get to that if we look back at the budget and if you didn’t have that mortgage payment you would be in pretty good shape. You’d actually have about $700 left over each month.
Client: Yeah I figured it with my son and I told him I would like to save anywhere from $400-500 for myself you know for my future needs.
Counselor : Yeah
Client: Because without using that money that’s in there
Counselor: Mmhmm. Yeah this gives you some flexibility that way. Potentially. It’s definitely one of the considerations. One of the elements that I wanted to mention on that interest rate of 3.7%
Client: Uh Huh
Counselor: Half a percent of that is actually going toward your mortgage insurance so there is a certain amount you pay up front. And then a little bit that you pay each month on that.
Client: Right
Counselor: So that the actual interest rate on the loan is about 3.2 % and then you add that half percent it in to pay for mortgage insurance.
Client; I see
Counselor: So that gives you an idea of what actually goes into your interest rate there
Client: Right
Counselor: I have covered a lot so far I’ve got some more to cover but I wanted to ask if you have any questions for me at this point.
Client: No. The only question I have is uhh oh the time element between my talking with you and when it goes to the lender and
Counselor: Mkay .
Client: and how much time that takes.
Counselor: Sure. Umm
Client: and oh when I will get a copy of this from you.
Counselor: Sure. Good question. You should get all of my information in the mail probably within two days I will put it in the mail as soon as we are done and I am going to send you, like I mentioned, a copy of your budget and a copy of the numbers that we are going through as well and also a copy of your counseling certificate and that’s an important feature. That certificate says that you talked with me and that we covered specific things.
Client: uh huh
Counselor: and its going to have my signature on there
Client: uh huh
Counselor:and you have to be sure that you sign it and that makes it valid.
Client: right
Counselor: If you do go forward with it, your lender will need that as part of your documents for your application.
Client: uh huh
Counselor: I will send you two copies, one for your record and one for your lender, if you decide to go forward with it.
Client: That would be fine. Another thing I figured you would send me and I can get together with myself and go through all my payments and every month and that way I can compare them and figure out my own how much you know goes out every three months to my dentists and all that.
Counselor: Yeah it kind of gives you a format or a template to work out your own budget from. That is a good idea. Good idea. So we talked a little bit about the payment options there. There are some pros and cons to that. The one thing to remember is whatever you borrow, if you use that money or you borrow it, it’s going to be added to your loan balance
Client: Right
Counselor: So that loan balance will start growing and it will start accruing interest or start being charged interest. The other thing, for example, is the lump sum, which it didn’t sound like your were really interested in, but the one thing about that is that once you use it and that money is gone you can’t tap into it anymore, so that credit line gives you the flexibility it sounds like you might be looking for.
Client: That’s what I am looking for
Counselor: So that sounds like it might be a good option. Be sure to definitely look into it further
Client: Right
Counselor: So the question that always comes up in when do I have to pay this back or how do I actually pay back the loan itself. I think I actually mentioned the requirements there’s a couple of what I call triggers for when you have to pay that loan back.
Client: Right
Counselor: The most common one is when you actually leave the residence permanently
Client: Right
Counselor: So either you pass away or you sell the residence or you move away, whatever it may be, those are going to be the triggers that require you to pay back the loan.
Client: Right
Counselor: The amount of time you have to pay back the loan varies a little bit and it depends on the servicer. Typically you have 6 months and you can ask for an extension out to 12 months. So you typically have a year to pay it back. What you will actually owe is what you borrowed plus the interest.
Client: Right
Counselor: So we know up front the closing costs that you financed into it and the money that you used to pay off your regular mortgage and then what ever else you have borrowed up to that point including interest.
Client: Right
Counselor: Typically the most common scenario we see is that people sell the property to pay the loan itself.
Client: Right
Counselor: So they use the proceeds to pay the loan itself again whatever is left over, for example if your loan balance is $200K and you sell the property for $300K, that $100K goes back to you.
Client: Right
Counselor: So something that you mentioned in the beginning is that the home is still in your name this is actually just a loan against the property.
Client: Right
Counselor: So do you have any questions about any of those aspects of it?
Client: No I just want to know what the payment is going to be.
Counselor: The payment itself?
Client: Do I have a monthly payment?
Counselor: You do not. That is a good question
Client: I wasn’t clear on that
Counselor: I am glad you asked there is not a monthly payment with this.
Client: Right
Counselor: So that’s the nice thing if it does pay off your existing mortgage you do not have a monthly payment. You are actually welcome to pay on it at any time you want.
Client: Right
Counselor: But you’re not actually required to pay anything back until the loan becomes due and payable when you leave the residence.
Client: Oh, ok but I can pay on it if I wish?
Counselor: If you wish.
Client: ok
Counselor: Let me ask you a question. Do you have any kids or any heirs that you were planning on leaving the home or property to?
Client: Well I’ve signed everything over, my pension and (barrel?) fund. I have taken care of that with my oldest son but uhh I am having my will changed so I will leave it with my three children.
Counselor: Ok. If you do decide to go forward with the reverse mortgage you will want to make sure you talk to your kids about it.
Client: Oh I have already talked to them .
Counselor: Ok. Because in the event you do pass away, they will be responsible for settling your estate which means they will be responsible for paying back this loan, most likely again through selling the property and paying it back that way.
Client: Right
Counselor: It sounds like you have already done so but I would encourage you to talk to them about it as you make the decision as well.
Client: My kids are adults so I have talked with them and discussed this with them.
Counselor: Ok, very good. A couple of other things I wanted to make sure that we covered the actual annualized loan cost of these. Are you familiar with the term annual percentage rate or APR?
Client: I just know what it means
Counselor: Ok so you have heard it out there?
Client: I have heard it lots of time yeah.
Counselor: The basic idea behind an APR is that they try to annualize the cost of a loan so if you got closing cost plus interest they try to say every year on percentage basis what this is costing you. A reverse mortgage is a little different. It’s an adjustable rate mortgage it’s not like you are going to get it for 15 years or 30 years. We have no idea how long you will have a reverse mortgage. We can take our best estimates and this is what is called a Total Annualized Loan Cost we call it TALC because it’s a lot easier to say that way.
Client: Right
Counselor: So I am going to send you some numbers on that you can look at and what it’s going to say is that if you have the loan for X amount of years and your interest rate doesn’t change but your loan is accruing at certain percentage rate than its going to give you a idea what the annualized cost is. The basic idea on this is that you are looking about 13,400 in closing cost the longer you have the loan the longer you can spread that cost out. What we typically look at say, if you know you are going to move in two years you may think twice about incurring $13,400 in costs in a short term loan like that but the longer you have it the more time you can spread out that cost and it goes down as a percentage the longer you have the loan.
Client: Oh good.
Counselor: Does that make sense?
Client: yep
Counselor: ok
Client: But I don’t plan on leaving.
Counselor: That’s the whole purpose of these loans is to allow seniors to stay in their homes as long as possible really.
Client: You bet.
Counselor: So that’s good to hear that.
Client: Right.
Counselor: So I will send that information to you in the mail so that you can look through it and see what those TALC rates are. There are a few other instances that may require you to pay back the loan.
Client: ok
Counselor: And this is something important you are responsible for your property taxes and your insurance.
Client: Property taxes and insurance. Ok I understood that.
Counselors: It sounds like you are already paying your insurance. Are you already paying your taxes or is that a part of your existing mortgage?
Client: No. It’s a part of my mortgage but I pay my own insurance I have everything with one agent.
Counselor: It makes easy to manage that way.
Client: The only thing I will have out is my property tax.
Counselor: Yeah and that’s an expense that you aren’t used to. A part of the loan contract itself says that you have to keep up on your property tax and insurance and in the event that you don’t, your loan servicer can actually come and say that you need to pay this or we are going to close up the loan and you will need to pay us back
Client: I understand that.
Counselor: it’s that important.
Client: Right.
Counselor: Another thing, I’m sorry did you have a question?
Client: No I was just going to say I have had the same insurance agent for 20 years.
Counselor: Oh yeah?
Client: And I plan on staying with him.
Counselor: That sounds like it’s a pretty good relationship. That should work well. The other thing to consider is what kind of state the property is in. Is it in a good state of repair or are there significant repairs that need to be done?
Client: Nothing needs to be done. I just had a new roof put on last year.
Counselor: Very good.
Client: Everything is real fine with it.
Counselor: Good. That is one thing when they do with the property inspection and if something is not right they will let you know about it but it sounds like things are ok.
Client: Right.
Counselor: Throughout the life of the loan, make sure that things stay in a good state of repair.
Client: You bet.
Counselor: That’s one of those things, if something is really wrong potentially that is another scenario where the loan could become due and payable
Client: Right
Counselor: So I just wanted to mention those. Do you receive low income benefits at all for example Supplemental Security Income or Medicaid?
Client: No I went over that with social security. I have too much, so I don’t qualify for SSI.
Counselor: That’s just one thing, if down the road you do receive any low income benefits, your social security is not affected by the reverse mortgage at all. But Supplemental Security Income or Medicaid can be reduced on a dollar for dollar basis
Client: Oh I see
Counselor: If you’ve got more than $2000 sitting in the bank, which may be from your reverse mortgage that you have deposited or whatever it may be, they can reduce those benefits.
Client: Oh ok.
Counselor: Just keep this in mind going forward. That’s something to consider. One other thing I wanted to talk about is income tax consequences. The reverse mortgage itself is a loan so it’s not income.
Client: Right
Counselor: So it means that you will not pay income taxes on the reverse mortgage loan. The other side is that there are not a lot of tax benefits to a reverse mortgage up front.
Client: Right
Counselor: The interest you pay on your mortgage right now you can claim on your taxes each year. The reverse mortgage is different because you are not technically paying interest until the end of it so there’s not tax benefit until the end of the reverse mortgage when you pay it back
Client: ok
Counselor: Just one of those things to be aware of and to keep in mind.
Client: ok
Counselor: I want take a quick break here and see if you have any questions for me?
Client: No I don’t
Counselor: Ok we talked about the reason you are looking for a reverse mortgage is that you are looking to pay off the existing mortgage that you have.
Client: Right
Counselor: Looking at options and alternatives that way it didn’t sound like you were interested in really selling the property or scaling back at all.
Client: No I am not interested in selling.
Counselor: Ok have you thought about getting a roommate to bring in some extra income?
Client: No I have had two wonderful women and I don’t want any more.
Counselor: Laugh) That’s understandable.
Client: Right.
Counselor: Did you have any other credit card debt or anything that you need to pay off?
Client: Well I have $250 to pay off that I put on credit card for my daughter when she flew up here.
Counselor: Alright well that’s not a real large amount. It sounds like you are doing alright that way.
Client: Yes I very seldom ever use it.
Counselor: It sounds like what’s really affecting you right now is the existing mortgage.
Client: Right
Counselor: The rest of your expenses are really reasonable it looks like you are in line for a one person household. What I am going to send you is a list of potential resources in the state of Washington.
Client: ok
Counselor: This will put you in touch with the local area agency on aging, local prescription programs, things like that especially since you are looking at an insurance transition you might contact them and see what options are available to you.
Client: Right
Counselor: I will send that out with some highlights on it for some things you might want to consider as well.
Client: Ok that would be terrific.
Counselor: One thing you might want to look at is a program that you have on property tax relief.
Client: Right
Counselor: Do you do much with the internet?
Client: No I don’t. All I have is an email machine.
Counselor: Ok. The list I am going to send you has websites on it and phone numbers so I will make sure that we get you some of the things to look into especially as you start to be responsible for your property taxes .
Client: Right
Counselor: I am looking back through my checklist to make sure that I have covered everything that I am supposed to as a counselor as well. Is there anything that you are still wondering about, anything that we haven’t covered or anything you would like to go back over again?
Client: No I think I am pretty well up on it. I have written down a few notes. I appreciate the way you talked to me and explained everything.
Counselor: Very good I will put my card in the stuff I am going to mail you.
Client: Right
Counselor: You can call me back at any time. Again I can’t tell you what to do but I can answer any of your questions.
Client: Great.
Counselor: Again I will put two copies of your certificate in there with my signature on it. Make sure you get yours on there.
Client: ok
Counselor: Then we should be pretty well on course.
Client: ok
Counselor: Anything else we need to go over?
Client: No.
Counselor: Ok I will put these in the mail for you make sure you call me if you have any future questions.
Client: Ok it was very nice to talk to you.
Counselor: You too.
Client: It would be nice to meet you in person.
Counselor: Maybe I will make it out to Washington.