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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:
    Original Home Value:
    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)
    248,0004,102 52,102275,625223,523
    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 Dave,

I think it is better if you do another appraisal and conform the current value of your home. This will give you an idea whether you are cheated or not.
Posted on: 18th Sep, 2007 09:48 pm
My mother has been in hospital in and out for the last few months. Her has a home of our own and receives social security benefits and my deceased father's pension as well as his ss. I stay in her home with my kids and we are about to do a living Will. Her medical bills are going up day by day and she was denied Medicaid also. There is a reverse mortgage in the home in her name only. Now if she passes away, shoulf we have to leave the home? Or do we pay for it? We have actually used up almost the entire money from reverse mortg as the houseneeded some repair and her bills too couldn't be managed by me
Posted on: 25th Sep, 2007 12:11 am
Hi Kally,

Welcome to our forums.

It's sad that you mother is suffering so much. Let's pray for her sound health.

As far as staying on the property is concerned, you can only do so till your mother is alive. After that, if you do not pay off the reverse loan, the lender won't allow you to stay there. And, if your mother moves out to a nursing home or any other property, the mortgage company would stop paying her and call the balance due. This is because the reverse mortgage is such that the borrower gets paid only as long as she stays on the property.

Let's hope something good turns out for you. :)
Posted on: 25th Sep, 2007 12:22 am
Hi Kally,

The reverse mortgage was taken by your mother. Now if she passes away, you may have to leave the house provided you do not pay off the loan.
Posted on: 25th Sep, 2007 10:41 pm
My mother is a senior citizen with a home that is paid off free of mortgages in Oakland California and I am thinking of doing a reverse mortgage for her. Do you have any suggestions on how I should go about doing this?
Posted on: 27th Sep, 2007 11:30 am
Welcome Orders,

I think you should consult a few reverse mortgage lenders and find out what rates and loan programs they have to offer - this is how you pre-qualify. And, then after comparing the monthly payments required by each lender, you can select the lender requiring you to pay the least amount on a monthly basis. Also, you should find out some details on his service background and get confirmed on whether he is reliable enough to deal with.
Posted on: 28th Sep, 2007 05:00 am
I owe 69,000 dollars on a mortgage my husband refinanced almost 5 years ago. He is now deceased and I am having trouble making the payment. I only get my SS every month and my house payment is half that. I can barely make ends meet. Please tell me I qualify for this program.
Posted on: 03rd Oct, 2007 07:32 am
Hi Mwhite,

Welcome to our forums.

I suppose you're asking if you can qualify for the reverse mortgage program. First of all, to be eligible for such a loan, your age needs to be of 62 or above. You haven't mentioned it anywhere, so I can't say exactly whether you meet this criterion.

If your intention is to pay off the mortgage debt using reverse loan proceeds, then that's actually allowed by the lender offering reverse loans.

As soon as you get the loan proceeds, you should pay off any existing debt on the home or else you may be in trouble. As far as social security is concerned, it will remain unaffected when you go for reverse loan.

Check out the Eligibility criteria for Reverse mortgage from a previous discussion on this topic.

Good luck :)
Posted on: 04th Oct, 2007 12:24 am
We have transferred all our interest in the home to our three children a year ago. And in return we have received a lifetime tenancy agreement from our children. We are now considering a reverse mortgage and for that we need our property to be deeded back to us. But would that disqualify us for the MassHealth program?
Posted on: 10th Oct, 2007 02:30 am
Hi Margaret,

Welcome to forums.

The transfer of the property (involving a life estate) back to parents would not affect their eligibility for the MassHealth assistance at all. However, it may affect the protections that the life estate could have offered in terms of Medicaid estate recovery and other liens.

Posted on: 10th Oct, 2007 02:50 am
I have been staying with my father for the last 12 years ever since my mother has passed away. I am now 24 and my father has to go to nursing home. But he has actually taken a reverse mortgage and right now I am in no position to take over the house. Will the nursing home then take over it? The house is in my father's name. and if that happens, what will the reverse mortgage lender do? In any way, can I take away the home?
Posted on: 15th Oct, 2007 01:15 am
Hi Deborah,

Welcome to the forums.

Not informing the lender won't be a good decision after all. This would be treated as a fraud if the lender discovers it. As far as nursing home's getting the property is concerned, I don't think that will happen.

If your father has applied for Medicaid, then as per the rules of eligibility, your father may be able to retain homeownership even if he in under nursing home care.

Take Care
Posted on: 15th Oct, 2007 01:50 am
I own a land with my wife in Arizona. The land is worth $120,000. We purchased the land some 4 years ago to purchase an RV, keep it on the land and save money by doing insurance. I don't think it will be easier for me to cope up with home prices and get much when I sell; so would a reverse mtg be the choice here? Could we buy land with reverse mtg and then after a few years get a loan on the land. ??
Posted on: 17th Oct, 2007 12:50 pm
Hello David,

You can buy land with reverse mortgage but in order to qualify for a reverse mortgage your age should be 62 years.

Will you be able to manage another loan on the land you purchase?
Posted on: 22nd Oct, 2007 01:17 am
Hello David,

You can buy land with reverse mortgage but in order to qualify for a reverse mortgage your age should be 62 years.

Will you be able to manage another loan on the land you purchase?
Posted on: 22nd Oct, 2007 01:17 am
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