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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.

Related Articles
Related References:
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What is a reverse mortgage?
Hi Nana,

You may take a reverse mortgage to help your daughter but you have to clear the outstanding debt that you already have.

You can do it with the proceeds of your first installment. Some of the things that you need to consider here are that by taking a reverse mortgage you are going to put your home at risk.

If your heirs are not able to pay the mortgage after you then they are going to lose your home. Also, you must own your house as your main residence so that the mortgage doesn't need repayment during your lifetime.

If you feel you are ready with these conditions, then you can go ahead and take a reverse mortgage program.

James
Posted on: 11th Apr, 2006 10:59 am
Hi Nana,

This is a decision that you have to take on your own. As you know that after the last surviving borrower, mortgage needs to be paid back by their heirs in order to keep the house.

Otherwise the house gets sold to pay off the mortgage. If the requirement of your daughter is giving too much trouble and there is no other way to help her out then you can think of helping her with the program.

You will be able to get a reverse mortgage once you are above 62, but the other conditions need to be maintained so that it doesn't become due in your lifetime.

Angel
Posted on: 11th Apr, 2006 11:07 am
Hi MS. B,

Welcome to MortgageFit Forums.

Reverse mortgage doesn't depend on whether you are on a job or not. The basic requirement to avail this program is that you have to be 62 and above in age and must possess a home.

So, if you fulfill these basic requirements you can qualify for a reverse mortgage.

Feel free to ask if you have any more doubts.

God bless you.

For MortgageFit,
Samantha
Posted on: 11th Apr, 2006 11:16 am
my wife is 63 and ownes her on home, she owes 114,000 but is thinking about selling it because she cannot afford to make the 900.00 house payments, i have been talking to her about a reverse mortgage but i know very little about them. House valued at about 165,000, 4 years old.
Posted on: 15th Apr, 2006 11:51 am
Hi Johnny,

Welcome to MortgageFit Forums.

Let me tell you that your wife need not worry much on this issue. I know that it concerns her home but the important thing to think positively. Only then can she make the right decision as a lot of money is also involved here.

Your wife can very well go for a reverse mortgage but she needs to pay off the loan that she owes first. But since it won't be possible to make the payments, so she can pay off the old debt with the proceeds of the money that will be offered through the reverse mortgage.

Since your wife is 63 years old, she can qualify for a reverse mortgage provided she satisfies all other criteria. And, her property value seems to be higher than what she owes. So I think she can easily get rid off the previous loan.

Please visit our section on Reverse mortgage for further knowledge and information.

God bless you.

For MortgageFit,
Samantha.
Posted on: 15th Apr, 2006 12:26 pm
Based on some quick math and your wife's age and the values presented it would not appear that your wife will qualify for a reverse mortgage. There may be some other forward loan available to reduce the monthly payment. You should probably speak with a broker to see if there are other options.
Posted on: 16th Apr, 2006 06:40 am
After reading though this thread I thought a little Reverse Mortgage overview could be helpful.

A Reverse Mortgage offers seniors 62 years of age or older the ability to retain their personal and financial independence by combining mortgage and debt consolidation payment savings with monthly income - realizing real financial flexibility!

Unlike a traditional mortgage where the borrower makes payments each month, Reverse Mortgages provide payments to the borrower - in effect "reversing" the direction of the mortgage payments.

Reverse Mortgage loan programs receive high praise from sources such as AARP, FHA, Fannie Mae and countless national media sources ... and for very good reasons!

Top Reasons to Obtain a Reverse Mortgage:

    1. Never Make Another Mortgage Payment
    2. "Tax Free" Income via Monthly Payments, or a Lump Sum Payment, or a Line of Credit (or any combination of the three)
    3. You Still Own & Live in Your Home
    4. No Restrictions on Use of the Money
    5. No Income, No Medical and No Credit Qualifications
    6. All Remaining Equity is Yours (or your heirs) To Keep
    7. No Debt will be Passed onto Your Heirs or Family Members
    8. Possible Greater Net Worth after repayment

Reverse Mortgages are only available to seniors 62 or older and in the case of a married couple, both borrowers must be at least 62 at the time of application. Reverse Mortgages are only available on HUD/FHA recognized real estate (ie: no mobile homes sitting on wheels). The home must be occupied by each borrower as their primary residence and the mortgage comes due under all circumstances where the borrowers no longer live in the home.

Reverse mortgage terms are conservative by nature due to the fact that the lender will be holding the loan for an undetermined amount of time and the ultimate sale or refinance of the property must produce enough money to repay the loan + interest and fees. For this reason, the maximum allowable Reverse Mortgage loan-to-value depends on the age of the borrower and the equity remaining in the home. For these reasons, a 63 year old home owner with a current mortgage of more than 70 percent of their home’s value will not qualify for a Reverse Mortgage being as they more than likely will remain living in the home for many, many years to come without sufficient equity to repay the total loan.

Reverse Mortgages do have higher fees than many traditional mortgages so careful consideration is prudent … this is one reason why borrower counseling is a mandatory part of the loan process.

And finally, the only way to determine a borrower’s ability to qualify for a Reverse Mortgage based on age vs. equity while getting a comprehensive quote on the fees and terms is to apply with an approved Reverse Mortgage lender.

I hope this helps!
Posted on: 22nd Apr, 2006 01:07 pm
Bill, Excellent, fantastic points. :D

This overview will help many. Rather I will ask sam to make it a new article so that it can be added into the reference section, infact you can do the same. Doing this will help others to locate this article easily. What do you say :?:
Posted on: 22nd Apr, 2006 10:16 pm
Thanks Niicss ... I would be honored if Sam puts this 'overview' where it will do the most good for those seeking Reverse Mortgage information.
Posted on: 23rd Apr, 2006 05:26 am
Why not Bill, niicss has given a great idea. That would be excellent if someone effort are getting recognized by the community.

I will also vote for you Bill. :D

Adonis
Posted on: 23rd Apr, 2006 07:27 am
Thanks Niicss for the idea and Adonis for supporting Bill. This community is really on the way of becoming a family. It's a good sign for all of us.

Thanks

Caron
Posted on: 23rd Apr, 2006 07:44 am
Hello: I'm a Broker and have a client who is 72 and wife 77 who have equity in home in N.Y. They want to take out a reverse mortgage to purchase a second home in N.C. Is there anyway you can give me name of lenders who will do this. Their credit is "excellent". Thanks, looking forward to hearing from you a.s.a.p. Winnie
Posted on: 24th Apr, 2006 08:52 am
Hi, Winnie

Welcome to the forums.

As a moderator of MortgageFit Community, I would like to invite you become our community member. Our community will surely be benefited from your services and knowledge.

For your loan request, what I can suggest you is, you can signup for a loan request with as at http://www.mortgagefit.com/signup/

Once you signup, our Loan Department will get in touch with you and then you can proceeds the things from there.

Hope to see you as our community member.

Thanks

Caron
Posted on: 24th Apr, 2006 09:00 am
Can there be a co-signer for a reverse mortgage, such as a child who might stand to inherit the property? Is that legal? Would that person be obligated to make the payments?
Posted on: 27th Apr, 2006 09:51 am
Hi Stuart,

You can't have your son co-sign a reverse mortgage program. Reverse mortgage is solely for borrowers who are with an age 62 and above.

You need not pay back the mortgage during your lifetime, but after you if your children wish to keep the house, then they have to repay the mortgage loan.

Blue
Posted on: 27th Apr, 2006 10:11 am
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