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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?
my mother is 76 y/o, owns her home, widow and is struggling on $800/m. She lives in Houston, TX. Someone suggested "reverse mortgage" and indicated the state would own the home once she met her demise and the debt is satisfied in this manner. Is this true?
Posted on: 06th Jun, 2006 01:24 pm
Hi Faye,

Your mother can qualify easily for a reverse mortgage program as she is above 62 years of age (the minimum age required to qualify).

Reverse mortgage is meant for house rich and cash poor borrowers. The borrower can get the money against the equity of her home under this program if he/she is having a house.

The loan in not required to be paid back in her lifetime unless your mother sells her home or stops using the home as her primary residence.

After death the loan become due and it passes to the lender who normally sells it to recover the money. As an heir you can keep the house if you want but for that you need to pay the loan amount to the lender.

Feel free to ask for more queries.

James
Posted on: 06th Jun, 2006 01:33 pm
I have just been advised to look into "reverse mortgage" for my 76 year old mother. She struggles to live off of $800/month. She owns her home and there are no "hidden" lien holders. I was told the home is take as pay off if one received a "reverse mortgage" the home would become that of the lenders in the event of the consumers demise. Is this true? Also, is reverse mortgage available in the state of Texas?

Thank you, in advance.
Posted on: 06th Jun, 2006 01:57 pm
Hi Faye,

Welcome to MortgageFit Forums.

I can feel her problem. Now as James said that reverse mortgage program is meant for the senior home owners and your mother can avail this program to come out of her financial troubles.

It's true that in this program the loan is given against your home and the borrower need not pay back the money during her lifetime. The lender recovers that money after the death of the borrower by taking possession of the home.

The mortgage also become due if the borrower moves out of the home or sells it. In that case the lender needs to be paid off the loan amount. Other than these reasons a borrower will not have to pay back the money to the lender.

After your mother's death you can keep the house with you if you can pay back the mortgage. Otherwise the home will pass to the lenders.

Reverse mortgage is also available in Texas since November 2000. One more information I would like to give you is that in granting a reverse mortgage the lender doesn't look into the borrower's credit score or income.

You can shop around for the reverse mortgage program with diferent lenders in your area. If you want you can also take the help of MortgageFit Community to help you find an appropriate lender.

For that you can do an obligation free loan sign up with us. Once you signup, your details will be processed through our system by the MFCare Department. The department officials will negotiate with the lenders and try to find a perfect deal that matches your requirements and inform you as soon as possible. We respect your privacy and we take care of it sincerely.

Here, you can get some idea on how we follow through after you sign up with us.

Feel free to contact us if you have any more doubts. We will try to help you in the best possible way.

God bless you.

For MortgageFit,
Samantha
Posted on: 06th Jun, 2006 02:13 pm
Mother and Dad want to stay in their home, which is totally paid off, for as long as possible and have caregivers come into their home. This is what their reverse mortgage money will be spent for. When they die or are place in a care facility, how is the reverse mortgage paid back ? Is the entire loan amount paid back ?
Posted on: 08th Jun, 2006 05:27 pm
Hi Cathy,

In a reverse mortgage no monthly payment is due while it is outstanding. It will become due after the last surviving borrower among your parents dies.

The whole amount become due at that time but the amount owed can never exceed the value of the home. Normally the home is sold to recover the money or you may pay off the amount to keep it.

If the home is sold and the amount thus obtained exceeds the amount owed then the excess amount goes to you as their heir.

James
Posted on: 08th Jun, 2006 05:54 pm
In the reverse mortgage program, after you die/move out--is the entire amount due immediately from the heirs before it is sold, or is there a repayment plan option. or does that depend on the guidlines within each loan contract
Posted on: 13th Jun, 2006 09:04 am
Hi John,

Welcome to MortgageFit Forums.

Every loan programs follow the guidelines mentioned in the contact. Normally if the last surviving borrower of a reverse mortgage program dies, the loan becomes due and the house is acquired by the lender who generally sells it off to recover the loan amount.

But the heirs can always talk to the lender if they wish to keep the house. In that case the loan amount needs to be paid off to the lender.

If the lender sells the house himself and there is any excess amount obtained from the sale proceeds, then the heirs are eligible to get that excess amount.

Feel free to ask if you have more queries or doubts.

God bless you.

For MortgageFit,
Samantha
Posted on: 13th Jun, 2006 09:58 am
my son put money on a house for me in a state where he lives - because of health reasons i moved into the house of which is not to my liking and have a mortgage on it , i would like to find one and have put this one up for sale - have equityof about 25,000 to either stay in this house and fix it or get a bridge loan , and find another home to live in, i,m 83 live on 1,300 a month- which is better for me - reverse or the bridge, thank you
Posted on: 18th Jun, 2006 03:47 am
Reverse is good, as as you age will allow to have it. And the best part is you will enjoy several benefits too.
Posted on: 18th Jun, 2006 04:33 am
Hi,

A reverse mortgage will be the better option for you as far as your age is concerned. Also, you don't require paying monthly installments until and unless you sell off the property with the reverse mortgage. Besides, this kind of a home loan has several advantages for the seniors.

For more knowledge on this home loan, please click here.

Regards,

Jessica.
Posted on: 18th Jun, 2006 08:47 pm
The California Governor, Arnold Schwarzenegger has recently signed a bill in order to protect reverse mortgage borrowers from predatory lenders. Under the new law, customers should receive counseling from counselors approved by the Department of Housing and Urban Development prior to the loan closing.

The law coming into effect on Jan. 1, 2007 states that lenders will no longer require customers to take out an annuity as one of the conditions of the loan. The law also makes it mandatory for lenders to translate the loan document into Spanish, Chinese, Korean and other foreign languages provide the terms and conditions of the agreement are negotiated in that language.
Posted on: 12th Sep, 2006 01:12 am
AFTER REVERSE MORTGAGE HOME GOES TO WHOME. IS IT TO THE BORROWER OR THE BANK WHICH OFFERS REVERSE MORTGAGE.
Posted on: 18th Oct, 2006 02:55 am
Hi Vijay,

When you take a reverse mortgage, you still remain the owner of the house just as in any other traditional home loan. You need to make payments for the property taxes, homeowner insurance and for property repairs. After the loan is over, you or your heirs must pay off all the cash advances along with interest. Most well-to-do lenders will not want your house as they are interested in the repayment.

Thanks,

Caron.
Posted on: 18th Oct, 2006 03:22 am
Kindly enlighten me the accounting treatment of interest charged in a reverse mortgage loan scheme.
Posted on: 10th Jul, 2007 03:00 am
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