Reverse Mortgage Information

Reverse mortgages are becoming extremely popular worldwide. Many seniors (whether retired or looking at retirement) aged over 62 are often "Asset-rich and cash-poor". Often their home mortgages are paid off but are living on fixed or limited incomes. A "reverse mortgage" provides seniors the opportunity to take advantage of their home as a valuable asset and convert it to a source of income without losing home ownership. The reverse mortgage is often used to supplement social security payments, meet unexpected medical expenses, renovate the house or even to update the car.

How Reverse Mortgages Work

A reverse mortgage is basically a loan. The lender (bank) pays you a lump sum, a monthly advance, a line of credit, or a combination of all three - while you continue to live in your own home. To qualify for a reverse mortgage, you must own your home or have substantial equity in your home. The amount you are eligible to borrow is determined using your age, the equity in your home and the actual interest rate the lender is charging. Funds you receive from a reverse mortgage may be used for any purpose without any restrictions.

With a reverse mortgage, you do still retain title to your home. You therefore remain responsible for maintenance of your home and paying for all the relevant services and taxes. Depending on the reverse mortgage plan selected, the reverse mortgage is due with all the interest when you move, sell your home, reach the end of a pre-selected loan period, or die. When you die, the lender does not take title ownership of your home, but your heirs (family that inherit your home) must pay off the loan. Usually, the debt is repaid by selling the home or refinancing the property, leaving your heirs with the balance to keep.

There tends to be no asset or income limitations on borrowers receiving reverse mortgages. There are also no limits on the value of homes qualifying for a reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area (as of 2010 it did vary from $81,548 to $160,950), depending on local housing costs. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.

Facts to Consider about Reverse Mortgage

• Reverse mortgage uses up some or all the equity in your home, leaving fewer assets for you and your family when you pass away.
• Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month, because it is not paid on a regular basis. The amount owed increases over time due to the interest compounding. Some reverse mortgages have fixed-rate interest; others have adjustable rates that can change over the lifetime of the loan.
• Three typical kinds of reverse mortgages include FHA-insured, lender-insured, and uninsured. They all vary according to their costs and terms. Make sure you do check these features before selecting the mortgage type that best suits your needs and financial situation. Before considering any reverse mortgage, you should consult with you family members, your financial advisor and/or attorney.
• Your legal obligation to repay the loan is limited by the value of your home at the time the loan is repaid. This could include any appreciation in the value of your home after your loan begins.
• Reverse mortgage typically charges loan-origination fees and closing costs. Insured plans charge insurance premiums, while some plans even include mortgage servicing fees. You may be able to finance these costs if you want to avoid paying them in cash. But, if you finance the costs, they will be added to your loan amount and you will pay interest on them.
• There are many reverse mortgage plans available today. You should therefore consult your attorney or financial advisor about the tax implications of the particular plans you are considering.

Reverse Mortgage Benefits 

A reverse mortgage has many benefits associated with it. These are some of its most important ones:

• You won't need any income to qualify. The lender is the making the payments.
• You don't need to leave your home. You can stay in your home for as long as you want.
• You can't ever loose your home because you don't make mortgage payments.
• You don't have to make any payments on a reverse home mortgage.
• The funds are usually tax deductible.
• Most reverse home mortgages have no earnings limitations.
• You can never be thrown out of your home for as long as you live in it. However, you still need to make real estate and insurance payments.
• Your Social Security and Medicare payments are usually not affected
• You can use the money from the reverse mortgage for any thing you want.

Reverse Mortgage Disadvantages 

As with any type of mortgage, a senior reverse mortgage has some drawbacks. Many of them are only potential and depend on your individual situation. Nevertheless, it's a good for you to know about these drawbacks before choosing to apply for a reverse mortgage.

These are some of the facts you need to consider before choosing a reverse mortgage:

• Almost all reverse mortgages have variable interest rates. Your rates will change as the market changes.
• Since reverse mortgages work by decreasing the equity in your home, you can use up most of the equity, leaving little money left for you and your heirs. However, a "non-recourse" clause found in most reverse home loans prevents either you or your heirs from owing more money than your home is sold forth.
• Since you keep ownership of the home, you are still responsible for real estate taxes, insurance and maintenance costs.
• Most lenders charge origination fees and other closing costs for a senior reverse mortgage. Banks may also charge servicing fees during the duration of the reverse mortgage. These fees are already included in the mortgage.
• The interest paid on a reverse mortgage is not deductible in your income tax returns until the home mortgage is paid off (in part or whole.)
• There is usually a less expensive solution to your financial problems ( a credit line, refinancing your present home mortgage, etc.)

Reverse Mortgages – Frequently Asked Questions

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence.

2. How can I qualify for a reverse mortgage?

Typically you need to be a homeowner aged 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home.

3. What homes are eligible?

Typically to be eligible for a reverse mortgage, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. Condominiums and manufactured homes tend to meet eligibility requirements, however if unsure, speak to your reverse mortgage providers or attorney.

4. What's the difference between a reverse mortgage and a typical bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home. Typically, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

Also, with reverse mortgages you don't need to make any payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you are still required to pay your insurance, real estate taxes and relevant expenses such as your utilities.

5. Can the lender take my home away if I outlive the loan?

No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.

6. Will I still have an estate that I can leave to my heirs?

When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

7. How much money can I get from my home?

Typically the more valuable your home is, the older you are, the lower the interest, the more you can borrow. There are many online calculators you can use to give you an estimate.

For example, based on a loan at recent interest rates, a 65-year-old may be able to borrow up to 26 percent of the home's value, a 75-year-old may be able to borrow up to 39 percent, and an 85- year-old may be able to borrow up to 56 percent. You should discuss the formula with your lender and your financial advisor.

8. How are payments received?

You have five options:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.
• Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

** SPECIAL NOTE – This information should not be seen as financial advice. Seek professional advice if you decide to take advantage of a Reverse Mortgage.