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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?
I am in NewYork. My father is ill and he needs to go for nursing home care. He has had a divorce from my mother and now if he has to go into nursing home, I'll have to take out a reverse mortgage to pay for his nursing home costs. But my mother's name is also on the deed. so can I do the reverse mortgage without taking her consent? She's greedy and is likely to take away her share of property instead of helping me pay for my father's ill-health.
Posted on: 26th Oct, 2007 11:57 pm
Hi Peter,

If your mother doesn't want to give her share of property, you can't do anything about it. You should take your mother's consent to take reverse mortgage. If you have good equity, you can try for refinance also.

Thanks,
Larry
Posted on: 27th Oct, 2007 01:49 am
My name is not on the title, neither am I the borrower of the house. Should I pay it back when my father passes away? Is there a possibility that the government or ban k will come after me?
Posted on: 01st Nov, 2007 11:20 pm
Hi Anderson,

I think your father has taken reverse mortgage. So I would like to know if you are the only heir of your father. In that case, if you pay back the mortgage you will own the property. But if you do not pay back, they will take away the property. But they will not come after you or sue you in the court.

Thanks,
Larry
Posted on: 02nd Nov, 2007 12:09 am
Hello Anderson,

If you own the property after your father passes away then you are responsible to carry out all the financial liabilities.

If your father has taken a reverse mortgage then you will have to pay if off after your father passes away, if you are willing to own the property. Otherwise the lender has the rights to the property.
Posted on: 02nd Nov, 2007 12:45 am
i was given a quit claim deed with the person retaining a life esatae w/the right to sell. can he do a reverse mortage and hold me responsible?
Posted on: 05th Nov, 2007 12:45 pm
Hello Unlucky,

A person having a life estate will have all rights to the property till he is alive. So, he can do a reverse mortgage and that need not be paid off until he passes away. You as the grantee will receive the property after his death and then if you want to retain the property, you will have to pay the mortgage off.
Posted on: 06th Nov, 2007 04:57 am
Hello Unlucky,
I'm not sure if your situation is clear. I am also not sure if jenkins7 is correct in the advise given. To do a reverse mortgage the person responsible is the person on the deed. If you hold the deed alone. then the reverse can only be done by you. The banks will not allow the other person to do a reverse without being on the deed.

Are both of you on the deed?

If you both are on the deed and you are not 62 then again the reverse will not proceed. You have ownership rights and that needs to be considered.

I would consult an attorney on the status of your legal situation.

More details will be helpful
Regards
Tony G
Posted on: 06th Nov, 2007 10:18 am
Hello Tony,

If the grantor quit claims the entire property and also has a life estate, the grantor still has all rights to the property. He is liable to pay the taxes and make all other payments. The grantee becomes the owner only when the grantor passes away.

In that case, is it not possible for the grantor to take a reverse mortgage?
Posted on: 07th Nov, 2007 02:15 am
Tony, do you mean to say: if there are two persons on property and both are co-owners, only one of them cannot apply for reverse mortgage. Both have to apply and can only qualify for it if both are aged 62. Is that what you mean?pls clarify
Posted on: 07th Nov, 2007 04:12 am
My aunt who's retired now wants to give me her reverse mortgage of balance $25,000 so that I keep paying for her mortgage on a monthly basis. But is that possible that pay on her behalf, will the lender agree? Does it happen that I pay for her loan and title of the property remains in her name?
Posted on: 07th Nov, 2007 04:16 am
Hello Jenkin7,
What I am reading from Unlucky is not completely clear. I would recommend unlucky to seek professional advice in regards to the contracts in place.

Based on my knowledge and understanding a quit claim is very useful to transfer ownership from one party to the other who are already on the deed. Husband to wife or to kids etc. The grantor may not even have full ownership to give away to unlucky. Without doing a full title search the quit claim may not be enforceable.

This situation sounds like it is a business transaction with the stipulation that the grantor can use the property until he passes. That would be the life estate.
The bottom line is that a reverse mortgage will only be approved if the ownership requirements are met. That means anyone that is on the deed, title or has ownership interest must be 62 or older, living in the home as a primary residence. This is the only way the bank doing the loan as an investor can protect their interest and limit their risk as they will not receiving payments on a monthly basis allowing them to limit there risk.

So in my understanding of this situation. The quit claim gave ownership to unlucky either in whole or as part ownership. Either way unlucky has been granted some type of ownership of this property.

If unlucky is not living there and his name is on the deed, even if he is 62+ the reverse will not transact.

In my understanding, the grantor of the quit claim has signed over rights in one legal contract to unlucky...then in another legal contract unlucky is allowing the grantor to have use of the property until death. To me and please clarify...unlucky owns the property or has ownership rights.

I hope this helps
Tony Golden

This post does not intent to give legal or direct advice. These comments are of my own personal opinion. Seek legal advice before acting.
Posted on: 07th Nov, 2007 05:21 am
Hello mac_7,

Thanks for the question.
To answer your question.
A Reverse Mortgage is more of a loan on the property then a loan on the borrower. In order to grant a mortgage on the property everyone with ownership must agree and qualify by age to do the reverse.
So if you have a co-owner situation, everyone on the deed must be 62+ and living in the home as part of the qualification.

Many times we have home owners where one is 62 and the spouse is 58 etc. The reverse mortgage will not proceed unless the younger party removes themselves from the deed. That is a big decision as that leaves the spouse without present ownership and will have to be granted ownership in the will etc.

Even if you have 2 people that are 62 and have ownership rights but only one lives in the home, the non resident must be removed from title or move in to qualify.
I hope I answered your question, if not let me know and I will explain further.
Regards
Tony g
Posted on: 07th Nov, 2007 05:35 am
Hello Adam,
I am a little confused by your question. Please clarify.

If your Aunt has a Reverse Mortgage then there are no monthly payments to be made.

Are you sure she has a reverse on the home?

Also she is not able to assign the reverse mortgage to anyone. If she is wanting you to have use of the property then you will have to use it together.

If she truly has a reverse mortgage then it will become due and payable if she is out of the home for more then 6 months.

I don't want to confuse the issue without clarification. Your comment on making payments is confusing as there is no monthly payment requirements on a reverse mortgage.

Please explain more so I can help you with your question

Regards
Tony Golden
Posted on: 07th Nov, 2007 05:43 am
Hello All,

I just wanted to correct something I said in my previous posts.

A life estate can be in place when getting a reverse mortgage as long as the terms of the life estate give full power to obtain a mortgage.

So read the terms of the life estate to determine your individual situation. If all parties agree the life estate can be changed to all full rights to mortgage the property.

And as always consult with an attorney.

Sorry for the lack of clarity. Even I get behind on the updates.
Tony Golden
Posted on: 07th Nov, 2007 09:41 am
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