How Do You Know if You Need a Reverse Mortgage?

With the growing popularity of Reverse Mortgages across the country, more and more seniors are asking themselves, “Do I need a Reverse Mortgage?” This question can be answered by using several different means. This article will discuss several of the most common questions in discovering the usefulness of the Reverse Mortgage for different individual situations as well as some suggestions to beginning the process.

1) “I don’t have a mortgage! Why would I get a Reverse Mortgage?”

This is one of the most common disputes that arise when discussing Reverse Mortgages. A financial goal for many seniors is the removal of all mortgage debt to the home, but this methodology is becoming outdated with the creativity of home equity programs that have recently come about, including the Reverse Mortgage. One of the fears of taking out a loan on a mortgage-free home is the threat of default and foreclosure. The Reverse Mortgage is one product that removes this threat. There are never any payments required for a Reverse Mortgage as long as you live in the home. It allows you to utilize the equity available in the home without the threat of losing the home, and without the added burden of monthly payments.

2) “I don’t need anything.”

A Reverse Mortgage is commonly used to remove a current monthly mortgage payment, to help a senior out large medical or credit card debt, or to secure an investment or an insurance product. However, the phrase “I don’t need anything” is a statement that is frequently used without looking at all the safeties and possibilities of having a Reverse Mortgage. A Reverse Mortgage can work as an extremely effective “safety net.” It can establish a large, extremely liquid, and high interest earning account that can be counted on in the event of an emergency or an opportunity. Right now, Reverse Mortgage credit accounts, which function very similar to checking accounts, earn well over 6.7%. This extremely useful when a medical crisis occurs, or a timed financial opportunity presents itself, and the senior will not have to affect any of their savings, investments, or income.

3) “Why would I give my house away?”

This is a common misconception that many seniors have when learning about Reverse Mortgages. First, a Reverse Mortgage Lender does not take your home or ownership of the home. There is no transfer of deed or title. The senior retains all rights of ownership they previously enjoyed and the only change is that the Reverse Mortgage becomes a lien on the property. The senior may sell the home and move at any time, and if the borrower should pass away, the home will be passed on to their heirs as designated in the will.

4) “I am on Social Security and Medicare. I don’t want to lose those benefits.”

The largest benefit of the Reverse Mortgage is its guarantees from the Federal government. The program is regulated and facilitated by the Department of Housing and Urban Development and due to this, all Federal benefits like social security and Medicare are not affected whatsoever by the additional income generated by the Reverse Mortgage. The government classifies the proceeds from Reverse Mortgage as equity, not income.
This also has the benefit of being 100% Tax-Free! You will not report any additional income on your tax return and the reserve of thousands of dollars of liquid funds will not alter your tax-bracket.

These are some of the more common questions regarding Reverse Mortgages that are presented in the early stages of acquiring the loan. Almost every applicant will ask themselves one or all of these at some point. Here are some actions that you can take to help in your decisions to move forward with a Reverse Mortgage.

1. Meet with a HUD Counselor – People looking for more information should meet with HUD-approved counselor. These meetings are free of charge an offer the senior the chance to speak with an impartial, third party expert who can answer questions and recommend a lender. They will also provide you with a mandatory certificate that will be required to start the process, which is valid for 6 months.

2. Use an online reverse mortgage calculator – These are sites that will allow you to enter in some basic information about your personal situation and get some preliminary numbers that will be standard with any lender around the country. These are extremely useful to get a basic idea of what you can receive so you know what to expect when you speak with a lender.

3. Speak to a Reverse Mortgage Lender – One benefit of the Reverse Mortgage program’s regulation by the government is that all lenders use the same interest rate, lending limits, and closing costs. There is very little discrepancy in the numbers involved in a Reverse Mortgage; so most decisions about lenders are based on the quality of service that is provided.

These are some of the issues that seniors deal with when they are evaluating whether or not to acquire a Reverse Mortgage. For many, the opportunity to increase income, fund a long-term-care insurance policy, get a head start on their loved one’s inheritance, or maximize the growth of their assets are reasons as well. Remember, the Reverse Mortgage works because it does not require payments to be made while the owner lives in the home, and a Reverse Mortgage does not affect the continued appreciation of the homes value. It will let a savvy senior have two assets working for them (the home’s value and the home’s equity) instead of one.

Reverse Mortgage Pros and Cons – Is a Reverse Mortgage a Good Idea?

I talk to senior homeowners every day who have tons of questions about the efficacy of Reverse Mortgages. “Is this a good idea for me?” “Will I lose my home?” “Now the bank will be on the title of my property, not me, right?” These are legitimate questions. Many things in life have advantages and disadvantages. Reverse Mortgages are no different. So here are some things that may help you if you’re looking for information on Reverse Mortgages:

The PROS of Reverse Mortgages: (also called senior mortgages)
• Tax free income guaranteed by the Federal Government which continues as long as your home is your primary residence.
• You can change your plan at any time from a line of credit, cash out, monthly checks, or a combination (depending on what remains).
• The remaining Line of credit grows each month at half percent over the current interest rate.
• Unlike an equity loan there are no income, credit, or health qualifications.
• A good option for seniors who wish to remain in familiar surroundings and in the same community where they’ve lived for years.
• Moving can cause emotional turmoil for many senior homeowners. Memories were made in your “home sweet home”, and close proximity to love ones and remaining in your community may be a better option.
• Reverse Mortgages can satisfy your existing mortgage or debts, though your debts are transferred to your Reverse Mortgage balance. (Your home does not have to be free and clear to qualify.)
• There are no out of pocket costs other than the appraisal fee and HUD counseling. Some HUD counseling organizations will waive the fee.
• You can remain in your home no matter what is owed on your Reverse Mortgage. You can never be forced out of your home as long as your real estate taxes and homeowner’s insurance are paid and as long as you maintain your home.
• You can refinance your Reverse Mortgage over and over again as long as there is remaining equity in your home.
• Upon the sale of your property you will never owe more than the home is worth. However, if you choose to pay off your debt and live in your home or if your heirs decide to pay the debt on your passing and retain the home, repayment of the full mortgage debt will be due.
• Your assets cannot be attached to repay the mortgage debt, and the debt does not pass to your heirs or your estate. The house stands for the debt (non-recourse loan).
• Reverse Mortgages have many safeguards: capped interest rates, a limitation on fees, HUD counseling, asset protection (non-recourse loan), no maturity date (cannot become due during a borrower’s lifetime).
• Can be a financial tool to help heirs avoid some of the real estate tax.
• Your heirs may be able to claim the interest from your mortgage on their income taxes after your passing. (Be sure to consult your tax advisor for advice.)

Now, those are the pros. Pretty easy, right? Sure, the dutiful old loan officer always gives you the good parts, but there are some things that may be drawbacks to Reverse Mortgages. Here are the cons:

The CONS of Reverse Mortgages:
• A Reverse Mortgage has all the typical closing costs one finds with a typical mortgage. However, they can be more costly. There is FHA mortgage insurance and additional closing costs, but those costs are typical of any FHA mortgage.
• A Reverse Mortgage can reduce your children’s and grandchildren’s inheritance. A Reverse Mortgage is a rising debt loan since you are not making mortgage payments. It is the opposite of a typical mortgage where equity increases as mortgage payments are made.
• Selling your home can often provide a greater return on your investment than a Reverse Mortgage.
• Moving from your residence in less than five years makes a Reverse Mortgage unwise. It does not make good sense to use a Reverse Mortgage short term.
• If you fail to pay your real estate taxes or homeowner’s insurance or neglect to maintain your home, the lender may require repayment of the debt. (Lenders, however, will work with you to cure the default.)
• If you are not residing in your primary residence for a period exceeding 12 consecutive months, the Reverse Mortgage will become due. (Nursing homes, assisted living, moving, etc.)
• If your heirs wish to benefit from your estate after your passing, they can sell the property and keep the remaining equity. They can also can get their own mortgage. However, in keeping the home your heirs must pay the full balance due.
• Medicaid may be affected, and you may not qualify for benefits unless you spend down your Reverse Mortgage proceeds each month. (Check with your attorney and Medicaid for info.)

When NOT to get a Reverse Mortgage:
• An equity loan may be a cheaper way of getting cash out of your home.
• If your primary goal is fixing up your home, a community loan may work better.
• If you are ill and assisted living or a nursing home is imminent, do not choose a Reverse Mortgage.
• When family members suggest that a senior Mortgage is not a good option, consider their suggestions and keep an open mind; they have your best interests at heart.
• If your children invite you to move in with them, this may be the perfect alternative to staying in your own home.
• A homeowner whose residence utilizes more than 25% of the total living space for their business will not qualify for an FHA Reverse Mortgage.

Keeping an open mind about senior mortgages is a must. Erroneous articles have shown up in print scaring away senior homeowners who would have benefited greatly from this program. If you’ve got questions, contact your local Office For the Aging and also talk to a Reverse Mortgage Specialist. Feel free to call me any time from 9 am to 10 pm seven days a week. I am here to help. This is what I do every day!

Understanding Reverse Mortgages

A reverse mortgage is one of many vehicles that individuals 62 years of age or older can use to turn the equity in their home into cash. It is very important, though, for an individual to fully understand reverse mortgages, their ramifications, and the alternatives. This article will provide an overview of reverse mortgages, as well as discuss alternatives.

What is a Reverse Mortgage?

With a “normal” home loan you pay a monthly amount (principal and interest). With each month, the amount that you owe goes down and the equity in your home goes up. As one might expect from its name, a reverse mortgage works in an opposite fashion. With a reverse mortgage you can turn the equity in your home into cash. You do not have to make monthly payments. The cash may be paid to you in one or more of the following ways:

  • As a single lump sum payment
  • As a regular monthly amount (a cash advance)
  • As a credit line account that you draw upon as needed

With a reverse mortgage, the homeowner continues to own their home and receives cash in whatever way is preferable to them. As they receive cash, their loan amount goes up, and the equity in their home declines. A reverse mortgage cannot grow to more than the amount of the equity of the house. In addition, a lender cannot seek payment of the loan from anything other than the value of the house. Your other assets and the assets of your heirs are protected by what is called a “non-recourse limit.”

A reverse mortgage, plus accrued interest, does eventually have to get paid back. Repayment of a reverse mortgage happens when the last owner of the property named on the loan either dies, sells the home, or permanently moves out of the home. Before then, nothing needs to be paid on the loan.

There are other circumstances in which reverse mortgage lenders can also require repayment of a loan prior to the above conditions. These include:

  • The borrower fails to pay their property taxes
  • The borrower fails to maintain and repair their home
  • The borrower fails to keep their home insured

There are also other default conditions that can cause repayment of the loan. Most of these are similar to default conditions for traditional mortgages (for example, declaration of bankruptcy, donation or abandonment of the home, perpetration of fraud or misrepresentation, and more).

A reverse mortgage should not be confused with a home equity loan or home equity line, both of which are other means of obtaining money for the equity in your home. With either of these loan vehicles, an individual must pay at least monthly interest on the loan amount received, or amount that they have drawn on their equity line.

Reverse Mortgage Eligibility

All owners of a home must apply for the reverse mortgage and sign the appropriate loan papers. To qualify for a reverse mortgage the borrower(s) must:

  • Own their own home
  • Be at least 62 years of age or older

A reverse mortgage is most typically a “first” mortgage, meaning that there cannot be any other mortgages or loans against the property, such as an equity line. An individual typically owns their home “free and clear” prior to seeking a reverse mortgage.

Reverse Mortgage Loan Amounts

The amount of money that an individual may receive from a reverse mortgage is a function of many different factors, including:

  • The specific reverse mortgage program that the individual selects
  • The type of cash advances received (e.g., lump sum vs. monthly payment)
  • The individual’s age (the older an individual is, the more cash they get)
  • The value of the individual’s home (the more valuable the home, the more cash they get)

Types of Reverse Mortgages

There are several different types of reverse mortgages. Some are more expensive than others. Types of reverse mortgages include:

  • Reverse mortgages offered by state and local governments (often called “single purpose reverse mortgages”). These are typically the least expensive reverse mortgages. These may be the most restrictive on how the money received can be used.
  • Federally insured Home Equity Conversion Mortgages (HECM). These are almost always less expensive than other private sector reverse mortgages, but more expensive than reverse mortgages obtained from state and local governments.
  • Other private sector (proprietary) reverse mortgages.

Alternatives to Reverse Mortgages

While usually an option that causes a negative emotional reaction, selling a home is an alternative to a reverse mortgage. The proceeds of the sale can be used to either rent, or purchase a smaller, more “age-friendly” home, while money leftover can be invested to provide additional income. This option should at least be considered and compared to a reverse mortgage so that an individual is making an informed decision.

Reverse Mortgage Counseling

Counseling is required in order to obtain certain types of reverse mortgages. Counseling is required before an individual can obtain a Federally-insured Home Equity Conversion Mortgages (HECMs). Even if counseling is not required for a particular reverse mortgage, individuals considering a reverse mortgage should seek either counseling or the advice of a qualified financial adviser.

Good Sources of Information About Reverse Mortgages

The American Association of Retired Persons (AARP) is an excellent resource for finding more information on reverse mortgages. Their web site (www.aarp.org) has extensive information on the subject. Information may also be found on the National Reverse Mortgage Lenders Association web site (www.reversemortgage.org), the HECM Resources site (www.hecmresources.org/index.cfm), the National Center for Home Equity Conversion web site (www.reverse.org), and the Federal Trade Commission (www.ftc.gov/bcp/conline/pubs/homes/rms.htm).