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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 Stuart,

Welcome to MortgageFit Forums.

I can understand that you are thinking for the security of your child. But as Blue said, reverse mortgage programs are for senior citizens only and they are meant to help people in the age group of 62 and above who are house rich but cash poor.

With a reverse mortgage program you can take cash amount against the equity of your house and you need not pay it back as long as you stay in the home.

The mortgage becomes due when you leave the house or sell it or after your death. To keep the property at that time your children needs to pay back the mortgage.

Otherwise the house will be sold by the lender to get back the amount. Of course if the amount from a sale is more the loan amount then the excess money will go to your children.

Feel free to ask if you have more doubts.

God bless you.

For MortgageFit,
Samantha
Posted on: 27th Apr, 2006 10:32 am
Stuart,

No. All applicants (ie: co-signers) MUST be 62 years of age or older.

There are no payments to be made on a Reverse Mortgage (payments go in "reverse" of a traditional mortgage). Any Reverse Mortgage will become due once the borrower no longer occupies the property and any family member that will inherit the property will have to either refinance the property or sell the property to pay-off any Reverse Mortgage lien.

Hope this helps!
Posted on: 27th Apr, 2006 10:38 am
I have a sister who is contemplating a reverse mortgage. She has no income other than the retirement monies from her deceased husband. How feasible is it for her to take out a reverse mortgage on her property. Does she lose the retirement monies from her husband?
Posted on: 15th May, 2006 05:59 am
Your sister need to look all the options before going into the deal. And as far as of loosing the money - No.
Posted on: 15th May, 2006 07:34 am
Hi Jeanette,

Welcome to our forums.

Let me assure you that your sister won't be losing if she takes a reverse mortgage. This is a kind of loan where you don't need to show a substantial amount to qualify. And, the best part is that you can pay the initial costs from the loan amount itself.

The costs will then be added to her loan balance which she will have to pay back along with interest when the loan period is over and under certain conditions like if she leaves the property or decides to sell it much before the loan term ends.

Thanks,

Caron.
Posted on: 15th May, 2006 09:15 am
Hi,

Your sister won't be losing the retirement monies, at least not in this kind of a mortgage. The costs in reverse mortgage vary from one lender to lender, so she doesn't need to worry, ask her to just shop around and hopefully she will come out with something good.

All the best to her.
Jerry
Posted on: 15th May, 2006 09:21 am
Hi Jeanette,

Here's something that can really help you - an overview of reverse mortgage. See, it's all about gathering a little knowledge that can surely help us get rid off our worries and make us more happy.

Just go through the section that I have mentioned and I hope all your queries will be answered. Still if you have some other queries, do let us know; we shall try to give you the latest information.

Happy reading!

Thanks,

Caron.
Posted on: 15th May, 2006 09:42 am
I owe 42,000,and my home is valued at 125,000.I will be 62 in Nov.2008.How much do i qualify for.
Posted on: 21st May, 2006 01:11 am
For reverse mortgage, your age must be 62 or above. You have got sufficient time to get your self in better financial position by 2008.

You can work upon your credit by the time being. For reverse mortgage, borrowers dont have to worry about too many things as it is available on easy terms.
Posted on: 21st May, 2006 07:51 am
Hi, george

Welcome to our Community.

Before 2008 you cant get qualified for reverse mortgage, so why not to work on lowering your debts. As you age needs to be 62 or above.

Please go through this article for more knowledge on reverse mortgage - http://www.mortgagefit.com/reverse.html

Adonis
Posted on: 21st May, 2006 07:55 am
my friend is a widow, and she took out a reverse mortgage and is concerned that when she dies her children will have to pay the loan. I say
no, but Im not really sure. Who does pay the loan. She does not want her
children involved.
Posted on: 21st May, 2006 01:28 pm
Hi Janet,

Your friend is correct, it's her children who will have to pay off the loan provided they are the heirs to her property after she dies.

For more details on reverse mortgage pay off, kindly visit this section.

Regards,

Jessica.
Posted on: 21st May, 2006 09:02 pm
After going thru 3 weeks of paperwork, home appraisal, etc., FHA turned me down because across the alley from my home and down a slope is a convenience store with 2 gas pumps. Is there any other source other than FHA/HUD to get a reverse mortgage? Thank you very much.
Posted on: 22nd May, 2006 08:46 pm
Hi Shirley,

You don't need to worry if HUD has disapproved your reverse mortgage. There are several private lenders and mortgage companies offering reverse mortgages, that too, at favorable terms and conditions. So you won't be having any problem in finding one.

Even our Community has good relations with a group of lenders offering a variety of mortgage programs. So, you can always get some help from any of these lenders.

But for that, please go for a no obligation free loan sign up so that we can send your request to our Loan Department and they will co-ordinate with the lenders and help you in their best possible way.

You may also browse through our Directory of Ranked lenders if you wish to select yourself the lender as per your requirements.

Wish you all the best.

Regards,

Jessica.
Posted on: 22nd May, 2006 09:30 pm
Hi Shirley,

In case you are going for a reverse mortgage, please go through the details here, as acquiring some amount of knowledge on this topic will always help you in the loan process.

Do let us know if you have further queries.

Thanks,

Caron.
Posted on: 22nd May, 2006 09:47 pm
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