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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:
    8%
    Original Home Value:
    $250,000
    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)
    124,0001,05225,052262,500237,448
    248,0004,102 52,102275,625223,523
    372,0009,22481,224289,406208,182
    496,00016,495112,495303,876191,381
    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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meta title: 
What is a reverse mortgage?
please send me info on your program for seniors. I am a social worker and have few clients that could benefit from your program. Most of them are up in age and can't cont to pay there current payment.
120 Broadcrest Dr, Pgh, PA 15235
Posted on: 20th Feb, 2006 11:11 am
Hi Teresa,

Welcome to MortgageFit Forums.

I appreciate you for the noble work that you are involved in. We do have different types of program on reverse mortgage offered by our network of lenders, based on the consumer's needs and eligibility.

I shall request you to sign up with us and place your query detail so that we may contact you and supply you with the information required.

For specific information on a specific requirement you may get the person to sign up with us and put in his/her details so that we directly serve them in the best possible way.

We will try our best to help you with your noble cause.

Feel free to ask if you have more queries.

God bless you.

For MortgageFit,
Samantha
Posted on: 20th Feb, 2006 11:31 am
Your website is very helpful in making the right decision/choice in an otherwise difficult process. My Dad and I THANK-YOU VERY MUCH! Keep up the good work!
Posted on: 02nd Mar, 2006 04:48 pm
Hi Yuhanna,

Welcome to MortgageFit Forums.

Thanks to you and your father for appreciating our effort. It's an encouragement for us that you liked our site.

We will try to live up to your expectations. Feel free to ask us if you have any problems.

We shall try our best to give you appropriate suggestions.

God bless you.

For MortgageFit,
Samantha
Posted on: 02nd Mar, 2006 05:01 pm
My father died and now the mortgage company states that I am responsible for his loan; even though he is not listed on my birth certificate as my father and I did not know about the processed loan. Also, his girlfriend has at least $12,000.00 of the money because she was on the bank account with him and when he died..she got all of his funds. Am I responsible for this loan? Why or why not?

Can this affect my credit? Do I need an attorney?
Posted on: 04th Apr, 2006 04:25 pm
Hi,

I feel sorry to hear about your father.

According to me you are not liable to pay any off the unpaid debts that were left behind by your father simply because he is not listed in your birth certificate.

Saying that, I would like to know a couple of things like have your father left any will or deed where it is mentioned that you will pay off his debts after his death. And is his girlfriend the co-owner of the property.

I would also suggest you to contact an attorney immediately.

Thanks,
Jerry
Posted on: 04th Apr, 2006 07:55 pm
Hello!

I am in Canton, Ohio and you can either send me information about a Reverse Mortgage for Seniors at 3833 Sanborn Avenue N.W., Canton, Ohio 44709-2258 and/or call me at (330 492-2247.

Mrs. Donald W. Keeran
04-05-06
Posted on: 05th Apr, 2006 08:14 am
Hi, Celia

What kind of information you are looking forward to. If you can be more specific then I can help you in better way.

You can get the information here http://www.ftc.gov/bcp/conline/pubs/homes/rms.htm
Posted on: 05th Apr, 2006 09:05 am
Hi Canton,

We would love to give you each and information you would like to have on reverse mortgage. But since it is a huge topic in itself therefore we would ideally like you to be more specific.

Thanks,

Caron
Posted on: 05th Apr, 2006 07:53 pm
When doing a reverse mortgage, does the owner still make monthly mortgage payments?
Posted on: 10th Apr, 2006 08:05 am
Hi Lynn

Welcome to the forums

For reverse mortgage, homeowner doesn't make any payments to lender during the loan. The loan needs to be repaid when the homeowner ceases to occupy the home as a principal residence.

The loan repayment obligation can't exceed the home's value or sales price.

Thanks
Posted on: 10th Apr, 2006 08:25 am
Hi,

There is no such repayment scheme required in a reverse mortgage program.
Reverse mortgage need not be paid back as long as the borrower occupies the property as his/her principal residence. Otherwise, it becomes due after the last surviving borrower dies.

Regards,
Blue
Posted on: 10th Apr, 2006 09:40 am
I am a widow, and I am still working a full time job . Will this effect my chances of getting a Reverse Mortage.
Posted on: 11th Apr, 2006 06:22 am
No, never and if someone has said you like that then he I am sorry to say that he knows nothing about it.
Posted on: 11th Apr, 2006 07:42 am
My daughter is in debt and needs money, creditors are after her, and I wondered if it was wise for me to get a reverse mortgage on my house to help her out. I do now have a low income senior citizen loan when I had to put in a new furnace, home is 25 yrs old in good shape. loan is 3500. My home is worth $96,000.
Posted on: 11th Apr, 2006 10:19 am
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