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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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What is a reverse mortgage?
Everybody who is at least 62 years of age, and occupies their home as their primary residence, will qualify for a Reverse Mortgage. Homeowners that don't have much equity will have a shortfall. That means the homeowner will need to contribute towards the Reverse Mortgage, and their only benefit will be elimination of their monthly mortgage payments.

For example, you're 66 but didn't provide your exact birthdate, so I'm going to use today's date, July 6, 1943. If your home was valued at $100,000.00, and you owed that exact amount to the lender, and you lived in California, you'd need to contribute $46,563.00 to enable the Reverse Mortgage to happen. That'd stop your mortgage payments for as long as your home is primary residence.

The program I quoted was the FHA-insured Home Equity Conversion Mortgage (commonly referred to as the HECM - pronounced "heck um") with a fixed interest rate of 5.56%
Posted on: 06th Jul, 2009 06:51 pm
My dad is 80, my mom is 71. Their house is paid in full. If they wanted to help me buy a house for myself would using a reverse mortgage be a good idea? The property's land value alone is worth about $650,000. How much money at their age would they quality for? If they do quality for a large amount and wanted to use that money to buy a 2nd home for me free and clear, what happens to that 2nd home paid for with the reverse mortgage money after death and the loan is mature and due in full on the 1st property? If we understand correctly, the lender would just take the 1st property to settle the loan debt right? Our plan is to have my parents and me on the title of the 2nd home. When they pass away, I'd just retain ownership of that 2nd home and hopefully owe nothing. Is that possible? Who sells the 1st home to settle the loan debt, the bank? Also, would this affect my credit score if I'm on the title of the 2nd home bought with the reverse mortgage, but not on the title of the 1st home? Thanks.
Posted on: 08th Jul, 2009 09:55 pm
Is it possible to build a guest house on a property that has a reverse mortgage on it?
Posted on: 21st Jul, 2009 02:48 pm
I WORK WITH SOMEONE WHOSE MOTHER IS NOW IN ASSISTED LIVING DUE TO ALZHEIMERS. HER MOTHER HAD A REVERSE MORTGAGE. THIS PERSON WITHDREW ALL THE REST OF THE MONEY FROM HER MOTHERS REVERSE MORTGAGE, (WHICH WAS APPROX $50K). SHE PAID OFF HER OWN HOME WITH THE REVERSE MORTGAGE MONEY AND HAS NO INTENTIONS ON TRYING TO SELL THE HOME. SHE SAID THE BANK CAN JUST REPO THE HOME. SHE IS GOING TO GET HER INHERTANCE ONE WAY OR ANOTHER. HER FATHER IS DESEASED. CAN SHE GET AWAY WITH
THIS?
Posted on: 23rd Jul, 2009 05:00 pm
Husband is in the Hospital - age is 54 with a 10% heart function. I am 64 needing a reverse mortgage to stay in home. Do I qualify?
Posted on: 04th Aug, 2009 06:56 am
I have a 1994 mobil I own the lots. I would like to trade up to a home close to my children. Can this be done and would my new home be free and clear If I paid it off?In other words reverse means they take in the old property for the money loaned and then the new property will be clear except for the difference in price? with that paid off the new property is mine free and clear? Jackie
Posted on: 17th Sep, 2009 08:45 am
My dad turned 60 this year and is in bad health an no longer able to work. He's collecting SSI and medi-cal. I talked to him and asked about reverse mortgage to see if this is an option for him. Does anyone know if he would qualify for this and how would it work if he is the only one on the title. If he were to pass what would happen to the home, especially because there is not will or living trust.
Posted on: 17th Sep, 2009 11:38 am
Are there any Reverse Mortgage options that don't requre the owner to live in the house{owner is in a nursing home} and the house is being rented to help pay for the nursing home?
Posted on: 27th Sep, 2009 11:19 am
Parents are in their 80's have been renting for 5yrs - they want to buy a house can they get a reverse mortgage loan if they put money down?
Posted on: 09th Oct, 2009 01:39 pm
The reverse mortgae is for some one who already owns a houseand have some equity in the house


If your parents are planning to buy a house now, they cannot get reverse mortgage
Posted on: 09th Oct, 2009 05:20 pm
Hi Scott,

One of the main conditions for getting a reverse mortgage is that the property must be owner occupied. An eligible property must be used as primary residence by the borrower. Reverse mortgage cannot be obtained on a rental property.
Posted on: 10th Oct, 2009 03:25 am
To E,

Since your father is 60 years old, he will have to wait for 2 more years to qualify for a reverse mortgage. The minimum age limit to obtain a reverse mortgage is 62 years. As far as your question regarding the title is concerned, he can definitely qualify for the loan even though he is only person on the title. After he passes away, you can refinance the property and pay off the mortgage. Otherwise, the lender will take possession of the property and satisfy their loan debt.

To Jackie,

You can obviously use your current mobile home to obtain a reverse mortgage and utilize the proceeds to purchase a new home. If the reverse mortgage proceeds cover the entire purchase price of the new home, it would be absolutely free and clear. But the catch is, you cannot get a reverse mortgage on a property, if you do not intend to use it as your primary residence. If you plan to move into the new home, you cannot get a reverse mortgage on your existing mobile home.
Posted on: 10th Oct, 2009 06:39 am
>>If they wanted to help me buy a house for myself would using a reverse mortgage be a good idea?

I like it. Your parents can do whatever they want with the money. I'm a parent and my preference is to see my son benefit from my hard work while I'm still alive.

>>How much money at their age would they quality for?

Approximately $366,011.00 (5.56% fixed interest rate)

>>what happens to that 2nd home paid for with the reverse mortgage money after death and the loan is mature and due in full on the 1st property?

Nothing. It's not effected.

>>If we understand correctly, the lender would just take the 1st property to settle the loan debt right?

That's correct

>>When they pass away, I'd just retain ownership of that 2nd home and hopefully owe nothing. Is that possible?

Yes

>>Who sells the 1st home to settle the loan debt, the bank?

If there's equity left, the heir will settle it, pay back the Reverse Mortgage lender, and keep the retained equity. Otherwise the lender will settle it via a foreclosure.

>>Also, would this affect my credit score if I'm on the title of the 2nd home bought with the reverse mortgage, but not on the title of the 1st home?

No. Since cash was paid for the home, your Credit wouldn't be impacted at all.

>>Is it possible to build a guest house on a property that has a reverse mortgage on it?

Yes.

>>CAN SHE GET AWAY WITH THIS?

Only if she has Power of Attorney

>>age is 54 with a 10% heart function. I am 64 needing a reverse mortgage to stay in home. Do I qualify?

Yes. Only you will be on the note and Title. Both of you will have to attend the Counsleing certificate and attend the counseling session. When Reverse Mortgages are done like this, I always recommend getting a Living Trust, to ensure Title transfers smoothly and quickly to the surviving spouse.

>>Can this be done and would my new home be free and clear If I paid it off

You should sell your current place first, pay back the Reverse Mortgage lender, and then get the new house.

>>Does anyone know if he would qualify for this and how would it work if he is the only one on the title.

Your Dad doesn't qualify because he's not 62. HUD isn't flexible in this area.

>>Are there any Reverse Mortgage options that don't requre the owner to live in the house

No

>>The reverse mortgae is for some one who already owns a houseand have some equity in the house. If your parents are planning to buy a house now, they cannot get reverse mortgage.

That statment is inaccurate. They can purchase a home with a Reverse Mortgage.
Posted on: 10th Oct, 2009 10:20 am
What happens when the reverse mortgagee dies?
Posted on: 07th Jan, 2010 03:38 pm
Hi Kmc!

Welcome to forums!

When the person who has taken a reverse mortgage on the property dies, his heirs will have to refinance the mortgage and pay off the dues. Or, the lender can sell off the property and recover the loan dues.

Feel free to ask if you've further queries.

Sussane
Posted on: 07th Jan, 2010 09:48 pm
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