Reverse Mortgages Help Seniors Gain Financial Independence

History of Reverse Mortgages

To better understand reverse mortgages, it is important to understand what they are and their history. In 1961, the first reverse mortgage was granted to Nellie Young who was a recent widow struggling to make ends meet in Portland, Maine. Luckily Nellie Young found Nelson Haynes, an employee of Deering Savings and Loan, who helped Young solve her financial problem. Haynes specially designed a loan, known today as a reverse mortgage, to help Young pay her bills and stay in her home. Initially a simple act of kindness, this type of financing revolutionized the mortgage industry by allowing homeowners to remain in their homes by converting their available equity.

In 1989, the U.S. Government created the Home Equity Conversion Mortgage (HECM) through the Department of Housing and Urban Development (HUD). According to HUD, reverse mortgages assisted nearly 80,000 Americans in the FY2010. This unique loan allows seniors to tap into the equity of their homes to gain greater financial independence by never having to make another monthly mortgage payment.

How a Reverse Mortgage Helps Seniors

This federally-insured loan allows seniors the freedom to choose to live in the comfort of their home instead of possibly moving to an independent living center or with relatives. These mortgages can offer seniors the opportunity to pay off debt and medical bills, supplement their social security and pension, or just complete a much needed home repair.

The way it works is by liquidating a portion of the home’s equity. This means borrowers can be rewarded for their years of hard work, dedication and commitment by using their home to remain in their home. Unlike a conventional mortgage, no monthly payment is required for the duration of the borrowers’ occupancy. As long as the homeowner resides in the home, they will never have to make another monthly mortgage payment again!

What are the Qualifications For A Reverse Mortgage?

To qualify for this unique mortgage, one must be 62 years old or older and live in the home as their primary residence. The FHA also requires that homeowners receive counseling from a HUD-approved agency before applying for the mortgage.

There are many types of homes that qualify for reverse mortgage. If a senior lives in one of the following they can take advantage of this unique loan:

  • A single family home.
  • 1 to 4 unit home or townhouse with one unit occupied by the borrower.
  • A manufactured home built after July 1976 that complies with FHA guidelines.
  • A condominium with FHA-approval.

In order to understand if a reverse mortgage is the right choice, it is important to understand all of the aspects of this particular loan. If one is short on cash and wants to tap into the equity of their home, a reverse mortgage may be the answer to their prayers. As long as a borrower maintains the home and its taxes and insurance, this financial product may be the right fit.

Benefits of a Reverse Mortgage

Another benefit of this type of loan is the mortgage does not have to be repaid as long as the homeowners remain in the home or remains current on real estate taxes, homeowner’s insurance, and home repairs. This means the homeowner will never have to make a monthly mortgage payment as long as they remain in the home. The funds that they are saving can be used however they wish with absolutely no restrictions.

How the FHA Protects Reverse Mortgage Homeowner’s and Their Families

If for whatever reason, a homeowner wishes to sell their home and move to a new permanent residence, they have that option. The money from the sale of the home will go toward the reverse mortgage balance and fees, and whatever is left over will be returned to the homeowner.

In the event of death the FHA has instituted reverse mortgage safety nets to help families through this transition. If the estate or heirs choose to sell the home then most likely the sale of the home will cover the remaining balance. Thus the remaining equity belongs to the heirs or the estate. However, if the heirs wish to keep the house then it will be their responsibility to pay the remaining balance and fees or obtain a traditional mortgage to finance the home. If for whatever reason the heirs cannot sell the house, then the FHA will pay the rest of the balance and take the loss. A reverse mortgage can help a senior homeowner access the funds they need to further enrich their life but will also insure their
families won’t be left with debt.

What are the Reverse Mortgage Loan Options?

Once all of these specifications are understood, then one can start to explore the loan options. The amount seniors can receive varies with age, home values, and interest rates.

Below are the five different disbursement options available with this federally-insured reverse mortgage loan:

  • 1) Lump Sum – Immediate access to a substantial amount of funds loaned at a fixed rate.
  • 2) Line of Credit – Have access to funds that are available whenever needed or until the line of credit is exhausted.
  • 3) Tenure – Receive the same monthly payments for the rest of one’s life.
  • 4) Term – Receive monthly payments for a set number of months.
  • 5) Combination, also known as Modified Tenure or Term – Allows seniors to combine any of the above options to specify their payment needs.

Many mortgage companies find that most borrowers are choosing the lump sum option due to the stability of a fixed rate. However, just like anything in life, it’s important to understand the program and the way it works. Contact a reputable specialist today for more information.

Reverse Mortgage Information For Seniors

A reverse mortgage used to be considered a last resort option for the so called, “cash strapped” seniors who needed to tap into home equity in order to get financial help during retirement. However, with home prices across the country declining at astonishing rates, and financial assets evaporating in the worst economic downturn since the Great Depression, more and more retirees are turning to a reverse mortgage as a necessary remedy to the financial crisis. This article will cover general information so that you will have a basic idea of what a reverse mortgage is and what the qualifications are in order to obtain one.

As you might be aware, reverse mortgages are becoming more mainstream by the day. More lenders than ever before, are offering this type of loan and each year the demand grows. It’s not just the economic crisis that has fostered this, but it’s also the rise in life expectancies, the rise in health care costs for seniors, and the overall increased costs of daily essentials.

SO WHAT EXACTLY IS A REVERSE MORTGAGE?
A reverse mortgage is a unique type of home equity loan that can provide lifetime Tax-Free income to seniors 62 or older. Senior homeowners that have accumulated large amounts of equity over many years of homeownership, now have a way to tap into this asset through a reverse mortgage and never make another monthly mortgage payment as long as they live in the home. Before this financial tool was available the only way to tap into this asset was to sell the home. Most people do not find this an acceptable option at this stage of life.

HOW DOES A REVERSE MORTGAGE WORK?
A Reverse mortgage works in exactly the opposite way that a “forward” or regular mortgage loan works. American Association for Retired Persons suggests, that one way to think about this mortgage is to visualize it as a “rising debt – falling equity” loan. This is very different from the purchase mortgage you used years ago when you first bought your home. That loan was considered a “rising equity – falling debt” loan. Although it was comforting to know you were building up equity over the years and working toward becoming mortgage free, now that you are there, you might be feeling a bit house rich and cash poor. Yes, the home is paid off or nearly so, but you may be having difficulty making ends meet from a cash flow standpoint. Your largest asset might very well be your home. But the only way you can access the cash, other than through a reverse mortgage, is to sell your home. Consequently, now might be the perfect time to consider reversing tapping into your home equity in order to have the financial freedom you deserve.

With a reverse mortgage, the lender pays the homeowner tax-free disbursements based on the amount of equity in the home, the interest rate and the age of the owners. The senior is not required to give up title, sell the home, or make monthly mortgage payments. The payment stream is “reversed” and the lender now makes payments to the homeowner as long as the senior continues living in the home. There are no income, medical or credit requirements to qualify for this type of home loan. The money can be used for any purpose.A Reverse Mortgage is a safe way for seniors to access home equity without making monthly mortgage payments. The HECM Reverse Mortgage Loan, endorsed by HUD and insured by FHA is the most popular reverse mortgage offered today. The purpose of this kind of loan is to allow you to receive cash from your home, without the obligation on your part to make monthly mortgage payments. The true beauty of this loan is that it does not require any repayment for as long as you live in your home.

HOW MUCH MONEY CAN YOU GET?
The Loan Amount is Determined By:
The Value Of The Home
The Age of The Youngest Borrower

The Current Interest Rate
Some people are under the misunderstanding that in order to get a reverse mortgage all they need is to own a home, regardless of how much is still owed on the existing mortgage. They think of this loan as a typical conventional refinance transaction where the loan amount can be very close to the value of the home. However, this is not the case with a this type of mortgage. Equity is the key component in determining a borrower’s eligibility for a reverse mortgage.

To be eligible, there must be significant equity in the property. Minimally, the amount of equity should be in the area of 50 to 60% of the market value, depending on the ages of the homeowners and the current interest rates. The reason the equity requirement is so high is because the equity must last the expected life-time of the youngest borrower. For example if the youngest homeowner has just turned 62 (which is the minimum age requirement to be eligible) the money being paid out to the seniors from their accumulated equity, could potentially have to last 30+ years.

QUALIFICATION CRITERIA
All owners on the title to the home must be at least 62 years old There should be a large amount of equity in the home The home must be the primary residence for all borrowers The home must be: Single Family, Condo, Town-home, 2-4 owner occupied home or manufactured on a permanent foundation and built after June of 1976. Criteria that are NOT considered are:

Income
Credit
Health

Although, not right for everyone, this mortgage can be the perfect answer for seniors who wish to remain in their home but are finding it a challenge to make their monthly payments and meet other financial obligations.

It is important to collect as much reverse mortgage information as possible before you decide whether this kind of loan is the right solution for you. Reverse mortgage consumer guides offer some of the best reverse mortgage information available today. Some great sources are: HUD and the National Council on Aging (NCOA.)

Benefits and Drawbacks to Reverse Mortgages

There are many myths in today’s market fueled by stories of the reverse mortgages of the past. The most common misconception is that you will have to give up ownership of your home to the lender upon passing away, or that with time you may be forced to move from the home or start making payments on the money borrowed. It’s been decades since those types of reverse mortgages were utilized, but that past still haunts seniors today who fear the unknown about these mortgages. The fact is that reverse mortgages are a safe and secure way to improve your lifestyle without ever giving up the ownership or equity in your home. The benefits to a reverse mortgage are many, and the drawbacks are few. However, full preparation and planning is a must as you decide what is right for you. The benefits of a reverse mortgage include:

Tax free money that does not affect Social Security or Medicare benefits.

The money received from a reverse mortgage comes from a loan you take against your home’s equity and is not considered taxable income. As a result you get the full benefit of these funds without giving any part of them to Uncle Sam.

Eliminate mortgage payments without giving up home ownership or its associated privileges.

A reverse mortgage is a loan that enables senior homeowners, ages 62 and older to convert part of their home equity into tax-free income – without having to sell their home, give up title to it, or make required monthly mortgage payments. FHA insures that you will never lose ownership or be forced to make payments or move from the home as long as you choose to live there. Further, the title to your home stays in your name until you chose to move or you pass away. At that time the mortgage and accrued interest is paid in full and the remaining equity is disbursed to you and/or your heirs. Because there are no payments associated with these loans, the program only allows a certain percentage of the home’s value to be borrowed, thereby ensuring there is always equity in the home. The percentage you may borrow is dependent on your age and the location of the property.

Keep the ability to leave the home and equity to your children and/or heirs. Should you pass away while living in the home you can still pass on the ownership of the home to your children and heirs. They may choose to keep the home or sell it. If they keep the home they will need pay the reverse mortgage balance in full – by way of a refinance or cash; or, if they chose to sell the home they claim all remaining equity once the reverse mortgage and its accrued interest is paid in full. In either event there is an allotted 6 month period for this process.

Freedom and flexibility to live an improved independent lifestyle. A reverse mortgage allows seniors to tap into money they’ve earned in the form of home equity, and in some cases avoiding having to depend on others for financial assistance. The money you get from the reverse mortgage is yours to use as you please. Do you have medical bills? Do you need to upgrade your home to fit physical needs? Maybe you just want to finally be able to travel and have more security – the decision is yours. With these funds you may live a better lifestyle without giving up your home ownership.

Purchase a home using a reverse mortgage. Should you choose to move now, or sell and move later you may use a reverse mortgage to purchase your new home. Once again you will have no mortgage payment as long as you live in your new home. The only stipulation is that you can only have one reverse mortgage at a time, and it must be on your primary dwelling.

No credit or income requirements to qualify. Reverse mortgages are underwritten and approved based on your age, the loan to value- percentage of equity in your home- and the location of your home. Because you have no payment requirements on the home, credit and income figures are not used to qualify or disqualify you from the loan.

Protection from Market Volatility. Once you sell your home or pass away you and/or your estate retains any remaining equity after the reverse mortgage and its accrued interest is paid in full. However, should market conditions worsen, or should any event occur leaving the balance of the reverse mortgage at a greater amount than its value, neither you nor your heirs will be required to pay the shortfall. FHA insurance protects lenders from these losses and guarantees that you will never be displaced from the home, and will never have to make a regular mortgage payment on that loan. As a result, you can borrow against your home now without the risk of losing it.

Sound too good to be true? There is a catch – your closing costs on the reverse mortgage include an insurance premium to FHA that pays for this protection. As a result, a reverse mortgage typically carries slightly higher closing costs than a traditional mortgage. You and your heirs are therefore protected in part from the housing market. You get the equity if home values go up, the lender takes the loss if the home is worth less than the payoff of the mortgage.

Closing costs. The closing costs on reverse mortgages are generally speaking a bit higher than traditional mortgages. These costs include paying the upfront FHA insurance premium and other costs associated with getting the reverse mortgage. However with the exception of the appraisal, these closing costs are not charged out of pocket, but are reduced from the loan proceeds upon closing. The appraisal fee can usually be refunded to you at closing.

Reduced equity in the home. Once you borrow money against your home equity a lien is placed against your home. That lien must be paid off once you sell the home or pass away. As a result there will be less equity proceeds going to you or your heirs upon selling the home because the reverse mortgage balance borrowed originally, plus its accrued interest must be paid off at that time. However should this balance be greater than the value of the home you will not be obligated to pay the shortfall.

Loan Responsibilities. You must adhere to loan responsibilities as agreed upon at closing. The primary responsibilities are: reside in the home as your primary residence, pay for property charges such as taxes, hazard insurance and homeowner association dues and maintain the property in reasonable condition. Failure to meet these responsibilities may result in the loan becoming due and payable.