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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?
I have a reverse mortgage at this time and want to purchase a home for my daughter, can I do that? I still live in my primary residence.
Posted on: 15th Jan, 2010 08:14 pm
Hi deckerdt,

As you have a reverse mortgage on your current home, I guess it will be difficult for you to qualify for a loan to buy a property for your daughter.

Thanks
Posted on: 15th Jan, 2010 11:28 pm
>>I have a reverse mortgage at this time and want to purchase a home for my daughter, can I do that? I still live in my primary residence.

Yes, as long as you can qualify for the new mortgage. Bank of America also offers their proprietary Reverse Mortgage, the "Platinum" program, and it'd allow you to purchase a second home with a Reverse Mortgage. So you'd be able to have your original Reverse Mortgage, and another Reverse Mortgage for your second home, and you could allow your daughter to live in it. But you'd have to live in it sometimes too, because it has to be your second home. That might be an easier way to go, because it'd be easier to qualify. That's the "pro". The "con" is you'd have to have a significant down payment in order to do that.

Ultimately the answer to your question is "yes", it's allowable, and you can accomplish your goal with either a Forward or Reverse mortgage.
Posted on: 16th Jan, 2010 08:26 am
1. we owe no money on our home and if you are married do both partners have to be 62.
2. if the house is only titled in the name of the person that is 62 or older would that home still qualify for the reverse mortg if both partners are living in the home?
Posted on: 09th Mar, 2010 01:10 pm
1. No

2. Yes
Posted on: 09th Mar, 2010 01:26 pm
My dad has a RM Line of Credit, he withdrew $1,000 and the amount he owed increased by the $1,000 and the Credit amount decreased by the $1,000. This appears to him as if he got $2,000. He wants to know why both amounts changed he would have expected that the Line would decrease by $1,000 and that would have been it. Can you explain this transaction in detail so I can relay that to him.
Posted on: 09th Mar, 2010 07:34 pm
Your Dad is seeing two things.

The amount he owes consists of equity that has been converted into cash. It will increase every month. You see, every month an interest charge is incurred against his outstanding balance, but it's deferred. So once a month the Lender reserves a portion of his retained equity for the payment, thus increasing the amount he owes on a monthly basis. All of the equity that's been reserved will be converted into cash when the mortgage is paid off.

The Credit Line consists of equity that hasn't been converted into cash yet. So when he took out $1,000.00, he actually converted $1000.00 worth of equity into cash. And when that happened it was added to the amount he owes (in addition to the regular monthly interest charge).

That's why he's seeing it listed twice on his monthly mortgage statement - the Lender is showing him the credit line withdrawal and that its been added to the outstanding balance.

He can also pay down the credit line, and he'd see the opposite effect on his monthly statement if he did that.
Posted on: 10th Mar, 2010 07:28 am
I have a reverse mortgage closed in Nov. 09 for the maximum $625,500. I have a great deal of equity above the $625,500.00. Is it allowable for the reverse mortgage lender to make a second equity loan on top of the insured reverse mortgage
Posted on: 13th Mar, 2010 07:14 am
Your existing Reverse Mortgage Lender won't be able to do it, but other Lenders can. You can get a Home Equity Line or any other type of mortgage. The new financing will be subordinated and in 3rd position, right behind HUD's 2nd place position.
Posted on: 13th Mar, 2010 07:58 am
my parents want to get a loan from their house here in california that is paid off already, they are trying to buy property in texas they also dont live here in california they live in texas they are both retired they also own property in texas. Is this reverse mortgage what they should be looking into?
Posted on: 28th May, 2010 07:51 am
They can only get a reverse mortgage on the home they live in. A reverse mortgage is a great option for those who are 62 yrs or older who would like to payoff there mortgage or cashout equity.

There has never been a better time to get a reverse mortgage with the lower closing cost that are now available.
Posted on: 28th May, 2010 08:44 am
To Raymond: What lender will go in second lein with a home equity behind a reverse mortgage?

Also I would point out to captjdl that the under 62yr old spouse isn't protected if something happens to the borrowing spouse, if possible they should wait until their spouse is over the age of 62.

nwreverse.com has a lot of information
Posted on: 16th Jul, 2010 09:25 pm
I am looking into a reverse for my mother. My sister lives with her and we are concerned about her housing future. When our mother passes how much time is there for my sister to relocate?

Thank you
Posted on: 02nd Aug, 2010 08:14 am
Your sister will have to refinance the reverse mortgage if she wants to save the property. The time given by lenders to refinance the property may vary. If the stipulated time is over, then the lender may start off with the foreclosure process.
Posted on: 03rd Aug, 2010 02:45 am
if my house is worth 40,000 and i owe 27,000 is it possible i could get areverse mortgage
Posted on: 15th Aug, 2010 06:12 am
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