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?
- How does a reverse mortgage work?
- Reverse Mortgage Costs
- When to pay back reverse mortgage
- What are the advantages of a reverse mortgage?
- Are there disadvantages of a reverse mortgage?
- Is Reverse Mortgage safe?
- How Reverse Mortgages differ from others
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:
- 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".
- 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
- 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. - 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. - 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-
- 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.
- 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.
- 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.
- 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.
- 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:
- 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: $250,000
Appreciation Rate of Home Value: 5% per annumEnd of Year Principal Amount ($) Total Interest ($) Loan Amount ($) Total Home Value ($) Home Equity ($)
(Total Home Value - Loan Amount)1 24,000 1,052 25,052 262,500 237,448 2 48,000 4,102 52,102 275,625 223,523 3 72,000 9,224 81,224 289,406 208,182 4 96,000 16,495 112,495 303,876 191,381 5 120,000 25,990 145,990 319,070 173,080
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. - 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. - 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.
Related Articles
- Which is better - Line of credit or reverse mortgage?
- Mobile home reverse mortgages for seniors
- Reverse mortgage - How it differs from traditional mortgages
- Taxes for Elderly Mortgage Applicants
- HECM - Hud reverse mortgage home loan
- What are Reverse annuity mortgages?
Related References:
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What is a reverse mortgage?
Harry,
I see. No your father can not default because their is no monthly payment and if something were to happen to your parents you would simply sell the home or refinance it if you wished to keep it.
The way a reverse mortgage works is the total opposite of a forward mortgage. Instead of making a monthly payment the lender pays you and the balance accrues on loan. Your loan can never be more than what the house is worth. Home=Loan. If your fathers balance goes to 700k and the house is worth 500k then you would just sell the home for 500k.
Does that help?
I see. No your father can not default because their is no monthly payment and if something were to happen to your parents you would simply sell the home or refinance it if you wished to keep it.
The way a reverse mortgage works is the total opposite of a forward mortgage. Instead of making a monthly payment the lender pays you and the balance accrues on loan. Your loan can never be more than what the house is worth. Home=Loan. If your fathers balance goes to 700k and the house is worth 500k then you would just sell the home for 500k.
Does that help?
How does receiving a lump sum in a reverse mortgage transaction affect ones SSI payments?
it will not affect your SSI or Medicare at all.
My dad applied for a line of credit reverse mtg. he could do without it but now that he has already taken it, can he apply for annuity? He has had the loan for a year now.
I need to pay about $45000 to get clear title to my property. The state appraisal for tax purpose is $70,000. Is it worth getting reverse mtg?
Rhonda, looks like you may not qualify, I'm not sure though.
Johnson, for reverse mortgage, you need home appraisal, so don't think the tax appraisal has much to do with it.
Johnson, for reverse mortgage, you need home appraisal, so don't think the tax appraisal has much to do with it.
Hello All,
Harry12: Brad is correct in his post. the only thing I would add is that a reverse mortgage is a non-recourse loan meaning the mortgage insurance you are required to have will cover the loan amount if it is higher then the value of the home if a sale takes place.
Shay Rhinelander: - the proceeds of a reverse mortgage are not income. they are assets you already own in the form of locked up equity. This should not effect your SS although there have been cases it has depending on how you distribute the money. Have your loan officer get the lender to review your personal situation.
Rhonda: - your dad can do what he likes with the money. It is his to spend in anyway he pleases. I would make sure that the annuity is the right thing to do based on his situation. If not done properly or for the right reasond the reverse is a growing debt and the interest on the loan could out pace the return you are getting on the annuity over a short period of years. that is why you see so much about annuities in the reverse contracts. We do not want loan officers or insurance agents having people do a reverse to simply put into a annuity as annuities pay big commissions. It has been taken advantage of many times.
Johnson: - Your tax value is not a accurate review of the actual appraisal of the home. many companies will do the appraisal for no cost as you persue a reverse. If the loan amount is not positive then you walk away if you care not to move forward. Your quickest idea is to see if a real estate agent can give you a list of the homes that sold in the past 6 months. that should give you an idea of what yours is worth.
I know it is direct and short but i hope it helps
tg
Harry12: Brad is correct in his post. the only thing I would add is that a reverse mortgage is a non-recourse loan meaning the mortgage insurance you are required to have will cover the loan amount if it is higher then the value of the home if a sale takes place.
Shay Rhinelander: - the proceeds of a reverse mortgage are not income. they are assets you already own in the form of locked up equity. This should not effect your SS although there have been cases it has depending on how you distribute the money. Have your loan officer get the lender to review your personal situation.
Rhonda: - your dad can do what he likes with the money. It is his to spend in anyway he pleases. I would make sure that the annuity is the right thing to do based on his situation. If not done properly or for the right reasond the reverse is a growing debt and the interest on the loan could out pace the return you are getting on the annuity over a short period of years. that is why you see so much about annuities in the reverse contracts. We do not want loan officers or insurance agents having people do a reverse to simply put into a annuity as annuities pay big commissions. It has been taken advantage of many times.
Johnson: - Your tax value is not a accurate review of the actual appraisal of the home. many companies will do the appraisal for no cost as you persue a reverse. If the loan amount is not positive then you walk away if you care not to move forward. Your quickest idea is to see if a real estate agent can give you a list of the homes that sold in the past 6 months. that should give you an idea of what yours is worth.
I know it is direct and short but i hope it helps
tg
Are there reverse mtgs offered by the government?
Hi Jayson,
Reverse mortgages are backed by HUD which is a division of the federal government. However these loans issued and serviced by lenders that are approved to do these types of loans. So you just need to go with a lender that is able to do them.
Reverse mortgages are backed by HUD which is a division of the federal government. However these loans issued and serviced by lenders that are approved to do these types of loans. So you just need to go with a lender that is able to do them.
Hi Jayson,
Welcome to the forum.
The Home Equity Conversion Mortgages are kind of reverse mortgages which are backed by the U. S. Department of Housing and Urban Development. If you want to know about features and benefits of HECM, check out this article at http://www.mortgagefit.com/hecm.html
Hope this will help you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Welcome to the forum.
The Home Equity Conversion Mortgages are kind of reverse mortgages which are backed by the U. S. Department of Housing and Urban Development. If you want to know about features and benefits of HECM, check out this article at http://www.mortgagefit.com/hecm.html
Hope this will help you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
i am now doing reverse mortgages for seniors. i believe the only way a loan can be done is on a manufactured or mobile home permanently anchored on land the individual holds title to. if it is otherwise i am very interested please contact me at "allan.haller@yahoo.com"
[Deactivated email address as per forum rules. Thanks.]
[Deactivated email address as per forum rules. Thanks.]
I have a reverse mtg on my home. Should I get the benefit of home price appreciation? What I mean is, if home price increase should any extra equity be added to the account?
Hi Mrs. baker,
Welcome to the forum.
If your property value increases that does not means your equity increases. But surely if you sell the house get some more money.
Best of luck,
Larry
Welcome to the forum.
If your property value increases that does not means your equity increases. But surely if you sell the house get some more money.
Best of luck,
Larry
I am over 62 years of age. Can I get a lump some amount of 60,000 dollars as reverse mortgage? Can I avoid federally insured provision?
Welcome Ronald.
I feel you can get the lump some of 60,000 dollars as reverse mortgage if you have enough equity in your property.
As far as I understand you are willing to get a Home Equity Conversion Mortgage which is offered by FHA. For this one you need to have the insurance. According to the insurance guideline you can never get more than the wrath of your property.
Hope this helps.
Let me know if you have any further questions.
I feel you can get the lump some of 60,000 dollars as reverse mortgage if you have enough equity in your property.
As far as I understand you are willing to get a Home Equity Conversion Mortgage which is offered by FHA. For this one you need to have the insurance. According to the insurance guideline you can never get more than the wrath of your property.
Hope this helps.
Let me know if you have any further questions.