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What is a reverse mortgage?
What is the qualification?
How much money can you get?
When will you get the money?
When do you pay the money back?
Can you lose your home?
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REVERSE MORTGAGE
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What is a reverse mortgage?
A reverse mortgage is a loan against your home that you don’t have to repay as long as you live there.
With reverse mortgage, conversely, the lender sends you money, and your debt grows larger
and larger as you keep getting cash advances, make no repayment, and interest is added to
the loan balance ( the amount you owe ). That’s why reverse mortgage are called rising
debt, falling equity loans. As your debt grows larger, your equity generally gets smaller.
Reverse mortgage are different from regular home mortgages in two important respects:
- With reverse mortgage, you don’t have to make monthly repayments. Thus, your income
generally has nothing to do with getting a loan or determining the amount of the loan.
- You can’t lose your home by falling to make monthly loan payments - because you don’t have any to make.
A reverse mortgage merits your consideration if it fits your circumstances.
Reverse mortgages may allow you to cost-effectively tap your home’s equity and enhance your retirement income.
If you have bills to pay, want to buy some new carpeting, need to paint your home, or simply
feel like eating out and traveling more, a good reverse mortgage may be your salvation.
How valid are common objections?
If you’re like most older homeowner, you worked hard for many years to eliminate your
mortgage so you’d own your home free and clear. After what you’ve gone through,
the thought of reversing that process and rebuilding the debt owed on your home is
troubling. Furthermore, reverse mortgages are relatively new type of loan that few
people understand. And most of today’s reverse mortgage borrowers are low-income,
single seniors who have run out of other money for living expenses.
Can you lose your home?
Thus, it’s not too surprising that folks who don’t fully understand reverse mortgages
often have preconceived notions, mostly negative, about how they work. Seniors with
home equity often erroneously think that taking a reverse mortgage may lead to being
forced out of their homes or ending up owing more than the house is worth.
You won’t be forced out of your home. Nor will you ( or your heirs ) end up owing more
than your house is worth. Federal law defines reverse mortgages to be non-recourse loans,
which simply means that the home’s value is the only asset that can be tapped to pay the
reverse mortgage debt balance. In the rare case when a home’s value does drop below
the amount owed on the reverse mortgage, the lender must absorb the loss.
Would a home equity loan or second mortgage work better?
Some people who are intimidates by having to understand reverse mortgages wonder whether
it would be simpler to get home equity loan or a new mortgage that allows them to take
some equity out of their home. The problem with this strategy is that you have to begin
paying traditional mortgages loans back soon after taking them out.
Here’s another big drawback of taking out a traditional mortgage to supplement your retirement income.
The longer you live in the house, the more likely you are to run out of money and begin
missing loan payments, because you drain your principal to supplement inadequate investment
returns and cover your monthly loand payment. If that happens, unlike a reverse mortgage,
the lending institution may foreclose on your loan, and you can lose your home.
Qualification for reverse mortgage
- You must own your home and must be at least 62 years old.
- Your home generally must be your principal residence and you must live in it more
than half a year.
- For the federally insured Home Equity Conversion Mortgage ( HECM ), your home must
be a single-family property, a two to four unit building, or a federally approved
condominium or planned unit development ( PUD ) For a Fannie Mae Home Keeper Mortgage,
you must have a single family home or mobile homes or cooperative apartments.
- If you have any debt against your home, you must either pay it off before getting
a reverse mortgage or, as most borrowers do, use an immediate cash advance from
reverse mortgage to pay it off. If you don’t pay off the debt beforehand or don’t
qualify for a large enough immediate cash advance to do so, you can’t get a reverse mortgage.
How much money can you get and when?
The whole point of taking out a reverse mortgage on your home is to get money from the
equity in your home. How much can you tap? That amount depends mostly on your home worth,
your age, and the interest and other fees a given lender charges. The more your home is
worth, the older you are, and the lower the interest rate and other fees your lender
charges, the more money you should realize from a reverse mortgage.
- For all but the most expensive homes, the federally insured Home Equity Conversion
Mortgage ( HECM ) generally provides the most cash and is available in most state.
- In general, the most cash goes to the oldest borrowers living in the homes of
greatest value at a time when interest rates are low. On the other hand, the least
cash generally goes to the youngest borrowers living in the homes of the lowest value
at the time when interest rates are high.
But remember, the total amount of cash you actually end up getting from a reverse mortgage
depends on how it’s paid to you plus other factors. You can choose among the following
options to receive your reverse mortgage money.
- Monthly: Most people need monthly income to live on
- Line of credit: Rather than receiving a monthly check, you can simply create
a line of credit from which you draw money by writing a check whenever you need income.
- Lump Sum: the third, and generally least beneficial, type of reverse mortgage
is the lump-sum option. When you close on this type of reverse mortgage, you receive
a check for the entire amount that you were approved to borrow.
- Mix and Match: perhaps you need a large chunk of money for some purchase you’ve
been putting off, but you also want the security of a regular monthly income.
When do you pay the money back?
Here are the conditions under which you generally have to repay a reverse mortgage:
- When the last surviving borrower dies, sells the home, or permanently moves away, “permanently” generally means that the borrower hasn’t lived in the home for 12 consecutive months.
- Possibly, if you do any of the following :
- fail to pay your property taxes
- fail to keep up your home insurance
- let your home fall into despair
If you do allow your home to go to waste, the lender may be able to make extra cash advances
to cover these expenses. Just remember that reverse mortgage borrowers are still homeowners
and therefore are still responsible for taxes, insurance, and upkeep.
What do you owe?
The total amount you will owe the end of the loan (your loan balance) equals:
- all the cash advances you’ve received ( including any used to pay loan costs )
- Plus all the interest on them – up to the loan’s non-recourse limit (the value of the home ).
You can never owe more than the value of the home at the time the loan is repaid. True
reverse mortgages are non-recourse loans, which means that in seeking repayment the lender
doesn’t have recourse to anything other than your home – not your income, your other assets,
or your heirs’ finances.
Even if you get monthly advances until you’re 110 years old, even if your home declines
in value between now and then, and even if the total of monthly advances becomes greater
than the value of your home. If you or your heirs sell your home in order to pay off
the loan, the debt is limited by the net proceeds from the sale of your home.
How is the loan repaid?
How a reverse mortgage is repaid depends upon the circumstances under which the loan ends:
- if you sell and move, you would most likely pay back the loan from the money you get from selling your home. But you could pay it back from other funds if you had them
- If the loan ends due to the death of the last surviving borrower, the loan must be repaid before the home’s title can be transferred to the borrower’s heirs. The heirs may repay the loan by selling the home, using other funds from the borrower’s estate, using their own funds, or by taking out a new loan forward mortgage against the home.
Not all reverse mortgage borrower ends up living in their homes for the rest of their lives.
Some folks who originally planned to live a particular house forever subsequently change
their minds. Other develops health problems that force them to move. So it makes sense
to plan for the possibility that you may sell and move some day.
How much equity would be left if you did?
If at the end of the loan, your loan balance is less than the value of your home
( or your net sale proceeds if you sell ), then you or your heirs get to keep the difference.
The lender doesn’t get the house. The lender gets paid the amount you owe, and your heirs
keep the rest of the house’s proceeds of sale.
If you take the loan as a credit line account, be sure to withdraw all your remaining
available credit before the loan ends. You have access to the money sooner that way,
and the amount could be more than otherwise may be left. For example, a growing credit
line could become greater than the left-over equity if the home’s value decreases.
How do reverse mortgages affect your government-sponsored benefits?
Social Security and Medicare benefits aren’t affected by reverse mortgages.
But Supplemental Security Income ( SSI ) and Medicaid are different. Reverse mortgages
will affect these and other public benefit programs under certain circumstances:
- Loan advances generally don’t affect your benefits if you spend them during the calendar
month in which you get them. But if you keep an advance past the end of the calendar
month (in a checking or savings account, for example), it counts as a liquid asset.
If your total liquid assets at the end of the any month are greater than $2,000 for
a single person or $3,000 for a couple, you could lose your eligibility.
- If anyone in the business of selling annuities has tries to sell you on the idea of
using proceeds from a reverse mortgage to purchase an annuity, you need to know that
annuity advances reduce SSI benefits dollar-for-dollar and can make you ineligible
for Medicaid. So if you’re considering an annuity and if you ‘re now receiving – or
expect that someday you may qualify for – SSI or Medicaid, check with SSI, Medicaid
and other program offices in your community. Get specific details on how annuity
income affects these benefits.
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Deciding Whether You Want a Reverse Mortgage?
Only you can decide what a reverse mortgage is worth to you.
The value probably most depends on your purpose for the money, such as
- Increasing your monthly income
- Paying off debt that requires monthly repayments
- Repairing or improving your home
- Getting the services you need to remain independent.
- Improving the quality of your life
One approach is to consider a major alternative: selling your home and moving.
Think about the following questions:
- How much money could you get by selling your home?
- What it would cost you to buy and maintain or rent a new one?
- How much could you safely earn ( that is , without exposing yourself to excessive risk ) on sale proceeds not used for a new home?
SecuredLoansCompared Services offer a wide variety of debt consolidation and debt management solutions for all types of financial problems.
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Home mortgages subject to credit review and approval