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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?
Hello,

Have you had a talk with any lender or have you already applied for a reverse mortgage?
Posted on: 10th Jul, 2007 04:29 am
Most of the reverse mortgages have adjustable rates based on yields on 1-year Treasury notes. On these loans there are no monthly payments & loan is not required to be repaid until borrower moves out of the house of he dies. Interest is charged on the outstanding mortgage balance & added to the amount which borrower owes every month. It means that the total debt increase over time as mortgage funds are advanced to the borrower and interest accrues on the mortgage.

Miller
Posted on: 10th Jul, 2007 03:59 pm
My parents are aged around 70's. And they are thinking of gifting cash to their children and grandchildren from their reverse mortgage funds. At their age they may have to go to a nursing home any time, so if they need medical help, how will they pay; I don't want them to be penalized for having not paid for the Medicaid money. Is gifting from a reverse mortgage handled in a different way compared to any other asset?
Posted on: 21st Aug, 2007 02:55 am
Hi Williams,

A reverse mortgage does not affect Medicaid payments. So, if your parents go for a Medicaid, then the proceeds from the reverse mortgage can be used anytime. Here the fund that they will receive from the reverse mortgage will be considered as an asset.
Posted on: 21st Aug, 2007 04:05 am
The cash obtained from a reverse mortgage is not considered as income because it is a loan taken against a property. So, gifting the funds received through a reverse mortgage does not affect the social security income or any government programs for which your parents can qualify for at this age. They can use funds from social security or other benefits to pay for the Medicaid even if they gift you funds from the reverse loan.
Posted on: 21st Aug, 2007 04:06 am
If I have a reverse mortgage, do I have to pay pmi in cash without adding it to the outstanding loan balance?
Posted on: 27th Aug, 2007 03:07 am
Hi Robert,

Welcome to the forums.

Since you have taken a reverse mortgage, there's no need to apply for a private mortgage insurance. The primary purpose of this insurance policy is to get your mortgage paid off once you default and cannot pay any more. The lender gets back his invested money. And, thus you can save your home from being foreclosed or sold off to repay the loan.

However in a reverse loan, there's no such requirement. This is because you own the home and once the loan period is over, the lender can sell your home and get back his money. Or else your heirs can pay off if they want you to keep the home.

Take Care
Posted on: 27th Aug, 2007 03:13 am
My grandmother wants to me to buy her reverse mortgage of $850 by paying her 30K. I will be the one paying for her loan then. But is this possible?
Posted on: 29th Aug, 2007 01:59 am
Are you buying the house or the mortgage? pls explain?
Posted on: 29th Aug, 2007 02:01 am
Hi Smith,

To transfer the reverse mortgage in your name, the lender may ask you to refinance the loan in your name and replace it with a new loan.

BTW, why does your grandmother want to transfer the reverse loan in your name? She is not required to repay the loan as long as she remain in the house. It needs to be paid only if she leaves the house or passes away.Then after her death, the lender may sell the house and recover the payments of the loan.
Posted on: 29th Aug, 2007 04:44 am
I do not come under the age criteria for reverse mortgage. So, can I take out my name from the title so that it's my husband who qualifies for the reverse mortgage? Will that be legal?
Posted on: 10th Sep, 2007 01:38 am
Hi Tabitha,

Welcome to the forums.

It is legal to take your name off the title to your property. But you need to think of other legal aspects of such a transfer, say, if your husband passes away during the loan term or if you later decide to go for a divorce. It is better to discuss this with your attorney so that he can make you aware of any future legal complexities that you may come across.

Take Care
Posted on: 10th Sep, 2007 02:59 am
Hi Tabitha,

If you do not fall under the age criteria for reverse mortgage, then there is no problem if you take out your name from the title to the property. You need not worry as it is absolutely legal. In that case, your husband who qualifies for the reverse mortgage age criteria, will be able to take the loan in his name.
Posted on: 10th Sep, 2007 09:42 pm
i don't know why but i've got reverse mortgage proceeds worth 50% of my home appraised value and i questioned ther lender but i couldn't make out hat they said. is it ok that i'm getting 50% of apoprasal or is this fraud?
Posted on: 18th Sep, 2007 02:46 am
Hello Dave,

The proceeds you get through a reverse loan will depend upon your age, the home value as well as the available rates. So, in your case, one of these factors may not be up to the mark. May be the appraisal needs to verified again. You may hire an independent appraiser and conduct another appraisal on your home. It doesn't seem to be a fraud.
Posted on: 18th Sep, 2007 02:54 am
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