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Reverse Mortgages: How seniors can tap equity for extra cash

Posted on: 19th Jun, 2005 12:36 am
If you're a senior, looking to cash out your home equity without having to worry about monthly payments, a reverse mortgage is what you may need. If you'd like to know how a reverse mortgage can help you, and what it's all about, check out the reverse mortgage information below:

What is a reverse mortgage?

A Reverse mortgage (reverse equity mortgages) is a home loan that provides you with a steady flow of tax-free income either in installments or in lump sum. Since the loan provides an easy flow of cash, it is the preferred choice of many seniors in the country.

How does a reverse mortgage work?

It's just the reverse of a traditional mortgage which requires monthly payments. With a reverse mortgage, your debt accumulates as the bank doesn't collect the payments till the loan period ends or you or your heirs sell. Here are 5 things you should be aware of before you apply for a reverse equity mortgage:

  1. How to get the cash:
    You can get the reverse mortgage loan funds in different ways.
    • The lender or the company can provide you with a single payment.
    • You may ask for monthly cash advances.
    • You can apply for a line-of-credit that gives you the opportunity to withdraw a required amount of cash whenever you are in need.
    • The lender may allow for a combination of monthly cash advances as well as "credit-line account".
  2. Reverse mortgage limit:
    The maximum loan amount offered ranges from $200,160 to $362,790, depending on the county you live in. However under the 2008 New Housing Bill, the loan limit has been raised to $417,000. For high cost housing areas, the limit is further raised to $625,000. However, the loan amount that you will qualify for, depends upon the factors given below:
    • Age of the youngest borrower
    • The appraised value of your home
    • The equity built up in your home
    • What loan program you choose
    • How you want to get the loan funds
    Besides the above factors, the loan limit may also depend upon current interest rates and closing costs on home loans in your area.

  3. How to qualify for the loan:
    Unlike other loan options, there is no minimum income or credit requirement to qualify for a reverse mortgage. However, if you have unpaid debt on your home, it should be paid off before you apply for a reverse mortgage or else paid off as soon as you get the loan proceeds. Check out if you are eligible for reverse mortgages.

  4. Loan types you can apply for:
    You'll find a variety of loan products available in the market. They're the FHA-insured Home equity conversion mortgage (HECM), the Home Keeper Mortgage offered by Fannie Mae approved lenders, and others. You need to compare these programs and decide on the one that suits you. Check out more on Reverse Mortgages Comparison.

  5. Reverse mortgage interest rate:
    These loans are mostly adjustable rate mortgages that adjust on a monthly, semi-annual, or annual basis. The interest rates are usually based on the 1 year U.S. Treasury (T-Bill) or the LIBOR index. However, you'll also find fixed rate HECMs offered by certain lenders. However, rate changes do not affect the principal you get; rather it affects the amount you owe.

What are the advantages of a reverse mortgage?

Reverse mortgages assisted countless homeowners improve their quality of life upon retirement. These are very flexible financial planning products with limited restrictions attached to them. Key benefits of this offer are listed below-
  1. No restrictions on the use of money:
    Money that you receive through a reverse mortgage can be utilized for whatever purposes you want. You can use it for funding the education of a family member, for traveling purposes, for meeting the basic necessities of life or for anything else. You can also park the amount in another account as savings for the rainy days.
  2. Less risks of default:
    In a reverse mortgage, there is no chance of losing your home for non-payment. Whereas, in case of a home equity loan, you may lose your home because of non-payment. Again, reverse mortgage lenders don’t have any claim on your other assets and income.
  3. Federally guaranteed:
    There are a variety of loan products available in the market. The most widely used reverse mortgage is the federally guaranteed home equity conversion mortgages (HECM). HECMs are managed by the Department of Housing and Urban Affairs. Since these offers are federally backed, you will continue to receive payments even if the reverse mortgage lenders default.
  4. Tax benefits:
    Reverse mortgage is treated as a loan. The money that you receive through this route is tax-free. This is regardless of whether you receive the money in monthly basis or in lump sum amount.
  5. Retains home ownership:
    As long as you stay in the house, you retain ownership of the house. However, you are responsible for paying for the property taxes, insurance and maintenance.

Are there disadvantages or dangers of reverse mortgages?

There are 3 reverse mortgage pitfalls to watch out for:
  1. Rising debt and falling equity:
    A traditional mortgage requires you to make payments and build up equity. But reverse mortgages reduce your equity because you don't need to make monthly payments, and causes your mortgage debt ratio to increase. Your equity gets lower unless your home value appreciates. Thus, reverse mortgages are often known as "rising debt and falling equity" loans.

    Here's an example on "Rising debt and falling equity".

    Monthly Loan Amount: $2,000
    Yearly Loan Advance: $24,000
    Yearly Interest Rate:
    Original Home Value:
    Appreciation Rate of Home Value:
    5% per annum

    End of YearPrincipal Amount ($)Total Interest ($)Loan Amount ($)Total Home Value ($)Home Equity ($)
    (Total Home Value - Loan Amount)
    248,0004,102 52,102275,625223,523
    5120,00025,990 145,990319,070173,080

    As the above calculation shows, even if your home value goes up, it may not be enough to raise your home equity. The rate of appreciation in the home value should be high enough so that even if your loan balance increases, your home equity won't go down easily.

    Now, when the appreciation isn't high enough, your equity will reduce, and as a result you may not have a home to leave for your heirs. This is because your heirs will only receive your home when the value of the home is more than what you owe.

  2. Rates and closing costs:
    The rates being adjustable can be higher at times thereby raising your interest and hence your debt because you aren't paying monthly. Some reverse mortgages have high closing costs, although under the new housing laws, the costs have been cut down and capped so that older homeowners can afford to get a reverse loan.

  3. Eligibility for Medicaid benefits: The loan proceeds may affect your eligibility to receive Medicaid benefits and Supplemental Social Security income (SSI). However, you can still qualify for Medicare and Social Security Income.
In spite of the reverse mortgage cons, these loans are preferable options when it comes to paying for your healthcare costs, remodeling your home, making a big purchase, or changing your lifestyle. Moreover, if you have debts to pay off, need money for someone's education, or wish to plan for a vacation, reverse mortgages are worth considering.

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What is a reverse mortgage?
I am thinking of taking a reverse mortgage. I am having talks with some lenders but each of them has been giving a different estimate. Can you let me know about the costs?

Posted on: 21st Dec, 2005 01:50 am
Different costs that are associated with reverse mortgages are much like that of traditional mortgage. These include loan originating fees, cost of property appraisal and credit report, FHA mortgage insurance premium and various other costs. Except the loan origination fee, all other costs can be included within the mortgage amount.

A reverse mortgage representative can provide you with a personalized cost estimate.

Posted on: 21st Dec, 2005 02:07 am
Hi Denny,

The following fees are charged in a reverse mortgage transaction.

Origination Fee:
The origination fee makes up for the lender's charges for making the loan, marketing costs and others. The origination fee is about 2% of the maximum loan amount (county FHA limit) of an HECM or any other reverse mortgage. Since the FHA limit varies from low cost to high cost areas, so the origination fee also changes in amount. The origination fee is often financed as part of the mortgage.

Mortgage Insurance Premium:
The HECM program requires borrowers to pay the mortgage insurance premium which ensures that you receive the loan advances even when your lender or loan servicer is out of business. This premium amounts to 2% of the maximum loan amount or home value, whichever is less, along with an annual premium equal to 0.5% of the loan balance. The MIP guarantees that you will never owe more than your home value while you pay off the reverse mortgage.

Appraisal Fee:
While you apply for a reverse mortgage, you need an appraiser to assess the current market value of your home. In return, he charges a fee between $300-$400. The appraiser checks for property defects and finds out whether your home structure complies with the Federal regulations. The appraiser may charge a fee for the second time when he conduct a second inspection of your property to check whether the repair work is completed. The fee for the second inspection ranges between $50-$75.

Other closing costs: Apart from the origination fee, mortgage insurance premium and appraisal fee, there are various costs that are paid at the time of closing. These comprise of credit report fee, escrow fee, courier fee, pest infection fee, recording fee, document preparation fee, survey fee and title insurance fee. The sections on Closing costs and Mortgage associated fees will provide you with the details of these costs.

Along with the above costs, you will also have to pay a servicing fee for the reverse mortgage.

Servicing set-aside fee:
This includes an amount which is deducted from the loan limit at the time of closing and makes up for the costs of servicing your account. The loan servicer may charge a monthly fee that can range from $30 to $35. This kind of fee is charged depending upon the borrower's age and life expectancy.

For more information you can refer to our section on reverse mortgage costs.

Posted on: 21st Dec, 2005 02:57 am
I noticed somewhere that one couldn't use a reverse mortgage on a mobil home... In my case I put a double wide on two acres. This acreage is worth 60 thousand. This acreage boarders the National Forest and a State Highway.. I remodeled the double wide to look like a standard stick built home. I owe 29 thousand on the double wide and also owe around $14,000 on credit cards that I want to pay off.. Also want to build a new living room on the house and buy a new transmission for my car that I've been told will cost $4000. I am 69 years old, have served in the Army for three year and was given an honerable discharged as a non-commissioned officer. My emplyment through out the years was as a Title Inusrance officer and Real Estate Broker. Can you help me if I applied for a $75,000 loan using a Reverse mortgage.
Posted on: 21st Dec, 2005 01:40 pm
Hi Mr. Norman,

Welcome to MortgageFit Forums.

It's an honor for me to communicate with a respectable person like you who served our nation in the best possible way. I shall be pleased with myself if I can help you.

Reverse mortgages are offered to double wide mobile homes by most lenders which are affixed. So, I don't think it will be a problem for you to qualify.

Can you please sign up with us at which is free just to get you registered for further communication?

If you wish you can leave your phone no. and area code with us here to let our customer care department discuss with you regarding the deal.

Please visit our section on mobile home reverse mortgage for more information.

If you have any more doubts you can post it here.

God bless you.

Posted on: 21st Dec, 2005 01:58 pm
i am a senior citizen living on less than $700 a month in social payments. my question to you is that if i get a reverse mortgage then what will happen to the $18,000 i now own on a home equity loan? and my daughter says that i will lose all the equity in my home. is it true?
Posted on: 29th Dec, 2005 09:25 pm

There are different types of mortgage which provide a lump sum of advance cash. And therefore you can pay off the existing home equity loan with reverse mortgage.
"And my daughter says that I will lose all the equity in my home. Is it true?" And regarding equity, with a reverse mortgage you are extracting value from your home that will be repaid when the property is sold. So in a way you are losing the equity but at the same time you will be gaining some cash.

Reverse mortgages tend to be expensive and seems to be the last financial option. so before you proceed towards getting a reverse mortgage, check with a local housing group or HUD counselor to make sure that you are considering a reverse mortgage product that does not include a claim against your growing home value. You can also seek help from an attorney who specializes in elder law.

Posted on: 29th Dec, 2005 09:43 pm
Can you get a reverse mortgage on a condo unit?
Posted on: 24th Jan, 2006 01:26 pm
Hi Mike,

Welcome to MortgageFit Forums.

Yes, there are some programs in a reverse mortgage that are offered against condominiums.

Feel free to ask if you have more queries.

God bless you.

For MortgageFit,
Posted on: 24th Jan, 2006 01:43 pm
are we able to use the reverse mortgage proceeds on a second home mainly used for a few months of the year.
Posted on: 25th Jan, 2006 10:29 am

The proceeds on reverse mortgages can be used to buy a second home. As long as the home on which the reverse mortgage is taken is your primary residence, you shouldn't face any problems with utilizing the proceeds of the mortgage.

God bless you.

For MortgageFit,
Posted on: 25th Jan, 2006 10:39 am
i am looking into a reverse mortgage for my mother. Her house is valued at around 90,000 and she owes 12000. I read that the loan will not affect her disability benefits, but that it may affect her medicaid (the cost of her medicine would exceed 600.00 a month w/o medicaid. What is the limit that she could have and yet not affect her medicaid benefits.
Posted on: 18th Feb, 2006 02:51 pm
Use the loan calculator to see if she qualifies.

[Edited by Jessica as per forum rules. Thanks.]
Posted on: 18th Feb, 2006 03:10 pm
Hi Linda,

Welcome to MortgageFit Forums.

Your mother's medicaid benefits and SSI is not going to be affected as long as she is spending the monthly cash advances fully and not accumulating.

For example your mother receives $5000 for home repairs and spends the amount within the same month; her resources are not going to be affected.

If her liquid resources exceed $2000, then she will be ineligible to receive a medicaid. Also the lump sum that she can retain without disturbing the benefits depends on the amount of other liquid resources that she is already having.

I shall suggest you to check with your local Area Agency and consult your financial advisor to know the exact guideline based on your detail.

Feel free to ask if you have any more doubts.

God bless you.

For MortgageFit,
Posted on: 18th Feb, 2006 03:11 pm
Linda -

Be sure to consider all options. You don't state your mother's age, but with the relatively small home value, existing mortgage payoff and steep reverse mortgage origination costs, this option may not generate much either as a lump sum or monthly payment.

There's lots of online calculators where you can tryout different scenarios. I plugged in for a 75-year old and the best result was $39,000 lump sum or $266/month for life. Of course your mother also gains by getting rid of the existing mortgage payment.

If your mother is at an age or health status that it seems likely she would remain in the home for 7 years or less, a home equity loan or line of credit requiring interest-only payments for 10 years may be preferable. She would avoid the high origination costs but would have to make monthly interest payments that would grow over time. These payments could be made by drawing on the credit line itself

Since she has good equity and is making payments on the remaining mortgage, she should be able to find a lender.

Reverse mortgages can be great tools in many situations, but there are other options that can be more cost-effetive at times. Good luck.
Posted on: 19th Feb, 2006 06:50 am
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