About Reverse Mortgages
For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home-equity loan or a cash out refinance and have a mandatory, monthly payment. But a conventional loan doesn't allow the homeowner acess to their equity.
A reverse mortgage is a risk-free way of tapping into home equity without having a monthly payment due each month and transferring the responsibility of paying back the loan from the individual borrower to the home. Instead of making payments the cash flow is reversed and the senior eliminates their mandatory monthly mortgage payment or may be able to receive payments tax free if they have enough equity. Thus the title "reverse mortgage".
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, access equity to have money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. The uses of this untapped equity are only limited by a person's imagination. The one restriction for the use of funds is the borrower cannot use their proceeds from a reverse mortgage to purchase an annuity.
For those seniors who are house rich and cash flow challenged, a reverse mortgage can allow them to remain in the home and on title and increase their cash flow tax free. Funds can be used for remodeling or repairs and when the time comes to sell, these improvements in the home may make it more valuable.
- "The lender could take my house." The homeowner retains full ownership. The Reverse Mortgage is just like any other mortgage; you own the title and the lender holds a lien.
- "I can be thrown out of my own home." Homeowners can stay in the home as long as they pay the property taxes, homeowners insurance, other fees such as HOA dues to age 150 of the youngest borrower, and with no payment requirement.
- "I could end up owing more than my house is worth." If this happens, the mortgage insurance would pay the shortfall if it is a FHA backed reverse mortgage.
- "My heirs will be against it." Experience demonstrates heirs are in favor of Reverse Mortgages. ARP did a study in 2007 and found that 94% of seniors homeowners with a reverse mortgage were satisfied or very satisfied.
Virtually anyone can qualify. You must be at least 62, own and live in, as a primary residence, a home [1-4 single family residence, condominium, permanent mobile home, or townhome] in order to qualify for a reverse mortgage.
There are no income, asset or credit requirements. It is the easiest loan to qualify for. A reverse mortgage is similar to a traditional mortgage. As an example:
- The bank does not own the home but owns a lien on the property just as with any other mortgage
- You continue to hold title to the property as with any other mortgage
- The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
- There is no penalty to pay off the mortgage early
The proceeds from a reverse mortgage are tax-free and can be used for any legal purpose you wish:
- daily living expenses
- home repairs and improvements
- medical bills and prescription drugs
- pay-off of existing debts
- long-term care and/or long-term care insurance
- financial and estate tax plans
- gifts and trusts
- or any other needs you may have.
The amount of reverse mortgage benefit for which you may qualify, will depend on
- the age of the youngest borrower at the time you apply for the loan,
- the reverse mortgage program you choose,
- the value of your home,
- current interest rates
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw any funds.
The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable within 6 months, and if needed 2 three month extensions may be granted, all additional equity in the property belongs to the owners or their beneficiaries.
There are two reverse mortgage loan products available, the FHA - HECM (Home Equity Conversion Mortgage), and Jumbo Proprietary Programs. Over 90% of all reverse mortgages are HECM contracts.
The costs associated with getting a reverse mortgage are similar to those with a traditional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs may be financed as part of the mortgage prior to your withdrawal of additional funds, if there is enough equity.
You must participate in an independent Credit Counseling session with a FHA-approved counselor early in the application process for a reverse mortgage. The counselor's job is to educate you about all of your mortgage options. This counseling session may charge a fee to the borrower and can be done in person or, more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate which must be included as part of the reverse mortgage application.
You can choose 3 options to receive the money from a reverse mortgage:
1) all at once (lump sum);
2) monthly payments;
3) a line of credit; or a combination of a line of credit and monthly payments. The most popular option, is the line of credit, which allows you to draw on the loan proceeds at any time.
To see an example of these options try ALLRMC’s free calculator.
Keeping money in a reverse mortgage line of credit in most states will not count as income for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. However transferring the money to an investment or to a bank account may represent an asset and would trigger a spend down requirement. Please note however that distinguishing between what portion of reverse mortgage proceeds might be counted as a loan and what portion as an asset is not a simple black and white decision. It is best to get an opinion from an elder attorney in your state.
If a senior homeowner chooses to repay any portion of the interest associated with his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt.
At the death of the last borrower or the sale of the home, the loan is repaid from equity in the home. Any remaining equity (which is often the case) goes to the heirs. Almost all reverse mortgages are the HECM loan which is guaranteed by FHA mortgage insurance. If there is not enough equity to cover the loan, the insurance satisfies the loan by paying the deficit. With a HECM loan, the bank will never come after the heirs to satisfy the mortgage obligation.
Contact a Reverse Mortgage Specialist to learn more.
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