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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?
Hi Byrdladi,

If you're 62 years of age, then you can apply for a reverse mortgage. However, once you receive the reverse mortgage proceeds, you'll have to pay off the existing loan immediately.

Thanks,

Jerry
Posted on: 16th Aug, 2010 03:35 am
I'm 82year old and own a totaly pay for condo apt.in Bethesda,MD;have no mortgage and no debt - I dont want to sell my property,however I need money-Do I qualify for any kind of loan ? Thank you -Lorena -
Posted on: 16th Oct, 2010 11:21 pm
Lorena, you would qualify for a reverse mortgage, yes. If you desire to obtain such a loan, you'll need to contact a lender who grants such loans. If you have trusted family and/or friends, they can probably recommend such a lender.
Posted on: 18th Oct, 2010 12:47 pm
I am younger than my husband. He does not want to wait for me to be 62 in order to take our a reverse mortgage...that would be almost two years. I am not comfortable with this. Can he go behind my back and get this loan without my consenting to it? If he does this and I wish to be added to the deed, can he prevent this? What would I have to do to get added to the deed if he does not want me on it?
Thanks
Posted on: 13th Nov, 2010 10:31 pm
I forgot to tell you that the home we have is in both our names and completely paid for. I am concerned that if he dies or divorces me that I would be left out in the "cold" so to speak. I do not think that a bank should lend one spouse money on property without the approval of the other who owns that same property also.
Posted on: 13th Nov, 2010 10:38 pm
if the home is less in value after the reverse mortage and there is no equity how can a senior find help for home repairs to their home to bring it updated with electrial and other home repairs such as a new roof and heating
Posted on: 15th Nov, 2010 03:29 pm
The senior can use the reverse mortgage proceeds in order to improve his or her home.
Posted on: 16th Nov, 2010 02:19 am
>>if the home is less in value after the reverse mortage and there is no equity how can a senior find help for home repairs to their home to bring it updated with electrial and other home repairs such as a new roof and heatingif the home is less in value after the reverse mortage and there is no equity how can a senior find help for home repairs to their home to bring it updated with electrial and other home repairs such as a new roof and heating

How did the homeowner receive their cash proceeds? Credit Line? Monthly payment? Or cash out?
Posted on: 18th Nov, 2010 07:30 am
My mother took out a reverse mortgage, recieved about 250,000 in year 2005, unfortunatly, she recieved the money in 50,ooo when she needed it, she is now 84 and no money left, I called to see if she could get more money, was told no, am currently speaking to met life guy who says they will pay off loan and she can get maybe 65,000 more. I'm scared but not much option left.
Posted on: 26th Jan, 2011 06:18 am
in 2005 fha's lending limits were lower, so homeowners with higher valued homes had a lot of equity left in their property when they got a reverse mortgage. since your mom is able to access another 65k, that means she has enough equity left to refinance her existing reverse mortgage with another reverse mortgage. when i personally assist homeowners with their reverse mortgage to reverse mortgage refinance, i don't charge the homeowners any fees. absolutely zero. and you should ask your metlife loan offier to offer you the same. she shouldn't have to pay a monthly service fee, origination fee, fha insurance premium, escrow, title, nothing. she'll receive more then 65k if she doesn't have to pay any fees. call me if you have questions and i'll walk you through the process.
Posted on: 26th Jan, 2011 08:11 am
My aunt has a reverse mortgage and is now in a nursing home. we want to keep the house in the family. If we pay off the loan will he deed go in our name?
Posted on: 27th Jan, 2011 10:07 am
Yes.
Posted on: 27th Jan, 2011 12:36 pm
On a reverse Mortgage can my mom consent to giving me her car since she can not drive anymore? Or for that matter sell it??

Thanks
Posted on: 08th Feb, 2011 06:17 am
Yes.
Posted on: 08th Feb, 2011 09:35 am
can i get a reverse mortgage on a condo
Posted on: 21st Feb, 2011 04:15 pm
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