Reverse Mortgage 101

Today’s financial market is one of the most difficult markets to navigate since the depression. Many questions about where to turn for advice and how to find the best financial products without sacrificing security abound. Reverse mortgages hold promise as a safe and secure tool, but many seniors have questions about reverse mortgages and the myths surrounding them. Questions include: How do they work? What do you give up if anything? And, how does the retention of home ownership work?

To start, let’s cover the basics and history of a reverse mortgage. The term came from early products in the 1980’s where the lender made payments to the borrower rather than the borrower making payments to the lender. As a result the product was named the “reverse mortgage”. These reverse mortgages (RM) often had significant downsides. Once the borrowers passed away the home became the property of the bank who lent the money, and at times terms applied where the borrower could be displaced from the home if they lived too long. Interest rates were typically adjustable with no fixed rate options available. Closing costs were often very high as well. In the 1990’s FHA, seeing great potential for the product, got involved and new rules were implemented allowing the borrower to pass on the home equity to their heirs, a guarantee to never be displaced from the home regardless of how long they lived, protection from home value volatility and much more. As a result, today’s reverse mortgages are a great option with very few drawbacks.

So how does the RM work? A reverse mortgage is similar to a standard mortgage in that it is a loan that is secured by real property, namely the home. The big difference is that there are no mortgage payment requirements on the mortgage. How is this accomplished? The RM requires that you have equity in your home and that you are at least 62 years old. As a result a calculation is made to determine the amount of equity that can be lent by looking at the age of the borrower, the interest rate charged and the location of the home. This tells FHA and the lender how much they can safely lend without ever collecting a mortgage payment. As a result the lender can lend with minimal risk, but must wait to make their interest until the homeowner either chooses to move or passes away. Foreclosing is rarely an issue- only in cases where the homeowner does not follow the terms of the loan such as not living in the home, not keeping the condition of the home to reasonable standards or not paying the property taxes and homeowners insurance. This makes a loan that is very appealing to the lender who simply wants to earn interest on a low risk loan.

So where does FHA come into play? FHA had an impact on the reverse mortgage industry when it started insuring the lenders against losses in exchange for certain benefits to the homeowner. This helped reduce interest rates and eliminated most of the big drawbacks of doing a reverse mortgage. If the lender issues an FHA reverse mortgage they are insured against losses should the balance of the mortgage be higher than the value of the home when the homeowner’s pass away. Further, the same FHA insurance leaves the borrower the ability to leave the home equity to their heirs- and in most cases there is equity left for the heirs. Today’s FHA insured reverse mortgages are referred to as HECM loans, or home equity conversion mortgage.

The benefits of today’s reverse mortgages include the ability to live in the home payment free, to receive money from the RM to do home improvements, pay off debts or other mortgages, get protection from housing volatility, and get funds that are not taxable (full article). Money received from a RM is not taxed because it is not income, it is in fact loan proceeds just as getting cash from a mortgage refinance. The money does not affect Medicare or Social Security income as a result, but can have an impact on Medicaid for those receiving that assistance. Current RM have many option types available, including fixed rate options, equity lines where you use money only as needed much like using a credit card- but without any payment requirements, and options for having monthly payments sent to you, or having a lump sum of cash given to you at the loan settlement.

Because of the issues from reverse mortgages of the past, many myths about reverse mortgages abound, and are often spread by financial consultants, radio personalities, close friends and relatives and even mortgage professionals who are not experts on reverse mortgages. We have included a full section on reverse mortgage myths to help clarify these myths and what the real facts are.

The myths include, but are not limited to the following beliefs:

  • The bank will own the home when I pass away or move.
  • My kids will not inherit the home equity.
  • I cannot purchase a home with a reverse mortgage.
  • Reverse mortgages offer only adjustable rates
  • My kids will have to pay the lender if the mortgage balance is higher than the home value when I pass away.
  • I cannot do a reverse mortgage if I currently have a mortgage on my home.
  • Closing costs are extremely high.
  • I will be forced to move from my home if I live too long.
  • I won’t qualify because of my credit or income situation.

Have you heard any of these myths yourself? It is likely you have heard at least one of these false statements before. There are many benefits to reverse mortgages, as well as a few drawbacks. We encourage you to get complete information from a reverse mortgage professional prior to making a decision on getting a reverse mortgage. You can get a free, no obligation quote and get all the facts so you can make your choice with confidence.

Is a Reverse Mortgage The Right Choice For You?

While Reverse Mortgages may not be for everyone, they can be an excellent choice for many. Are they the right choice for you? Let’s explore them in more detail.

What is a Reverse Mortgage?

o A Reverse Mortgage is a special, Government sponsored program designed specifically for homeowners over the age of 62. Unlike a traditional mortgage, there are no monthly payments to make. There are also no credit, asset or means requirements to qualify for the mortgage. This can be an important factor for seniors with less than sterling credit or for those living on reduced retirement incomes.

o Various programs are available with different rates and benefits. There are fixed and variable rate programs, each having different features. While most are still Government Programs, proprietary programs with individual banks have also been available from time to time. While you should always use the broker or bank that you feel most comfortable with, be sure they can offer you the most competitive programs.

o Under a traditional mortgage the monthly payments pay for the interest, and usually pay off principal on the loan, thereby reducing the amount of the mortgage. With the Reverse Mortgage the amount of cash you receive, together with the interest and other charges, are added to and increase the loan balance. This balance however, never has to be re-paid until you move out of your home. You do have to keep your taxes and insurance current and maintain the home, just as you already do.

o A Reverse Mortgage is a non-recourse loan. This means that no assets other than your home can be attached to pay off the mortgage. If, when the mortgage comes due, the mortgage amount is greater than the value of the home, the homeowner or estate will only be responsible for fair value of the home unless the home is taken over by a family member, in which case the entire mortgage amount may be due. In other words, a sale must be at “arms-length” or the full loan value may be due.

Should the value of the mortgage be less than that of your home, either you or your estate receive the remaining equity in the home when you leave or pass away. Taken together, these features offer what could be considered a “Win-Win” situation.

Your mortgage balance becomes due when you sell the home, when you vacate it for more than 12 months, or when the last surviving borrower passes away. On sale, it is satisfied at closing, as would be any other mortgage. Your heirs will have the options of paying off the amount due and keeping the home, or of simply selling the home and receiving any remaining equity.

Who can benefit from a Reverse Mortgage?

Seniors I have found most likely to benefit from the Reverse Mortgage would be homeowners who:

o May be struggling with the payments of a conventional mortgage or equity line of credit.

o Require or would like additional cash for rising expenses.

o Would like to access the equity in their home for needed repairs, a new car, medical or other specific needs.

o Homeowners seeking to age at home and who are not planning to move from the home in the foreseeable future.

o Seniors who would rather share with children or grandchildren while still around to see them enjoy it, rather than leave the home’s equity in an estate.

o Senior homeowners who are facing foreclosure because of their inability to pay their current mortgages may find the Reverse Mortgage an excellent, if not the only option allowing them to remain in the home.

o Seniors who simply “want to’ have more fun!

When may a Reverse Mortgage not be for you?

The initial closing costs of a Reverse Mortgage include the insurance which allows it to offer these benefits. While defined by the Government, these costs need be considered. Closing costs come out of the proceeds (no cash is required), but they will immediately impact the equity remaining in the home. The program is not designed as a short term program. When the initial costs are averaged over a longer period of time they are usually considered reasonable but if you are looking to move from your home in a short period of time, other options may be more attractive.

There is really no reason for seniors who are already comfortably meeting their financial desires to obtain a Reverse Mortgage other than for possible estate planning purposes.

Who Qualifies for a Reverse Mortgage?

Qualification for a Reverse Mortgage is pretty simple.

o The age of the homeowner/s must be age 62 or greater.

o The home must be and remain being, the primary residence. You have to live there.

o The home must be in good repair. The home will be appraised during the loan approval process.

o There can be no other liens on the home. (Current liens or mortgages can and must be satisfied from the proceeds of the Reverse Mortgage.)

How do you access the cash?

With a Variable Rate loan, you can access your cash in one of four ways. They are:

o Lump Sum – a single payment of cash.

o A Line of Credit – You can use or pay back as you like.

o Monthly payments, either term or tenure.

o Any combination of the above.

Monthly Tenure payments continue for as long as you (or your co-borrower) reside in the home, even if you have taken out more money than the home eventually ends up being worth.

With a fixed rate program, you are usually required to take all available proceeds at closing.

Other Reverse Mortgage Considerations

The proceeds received are not considered income, therefore no income tax is paid on them nor will they affect Social Security or Medicare benefits.

Proceeds may affect Medicaid, SSI or rarely other benefits. Homeowners receiving such benefits should consult with a professional or their provider to determine how any such proceeds should be handled.

While proceeds are not taxable, neither is the interest a tax deduction until it is repaid, usually at the end of the loan.

So how much money can you get?

The amount you are able to receive from your Reverse Mortgage is based on four factors. They are:

o The Age of the youngest homeowner.

o Current Interest Rates.

o The Appraised Value of the home.

o The Reverse Mortgage Maximum Limit in force.

For an analysis of how much money a Reverse Mortgage would provide, do-it-yourselfers can access a website calculator at http://www.rmaarp.com/ Your Reverse Mortgage provider will also be happy to provide you with a more detailed analysis.

How do I get a Reverse Mortgage?

The steps to obtaining the Reverse Mortgage are rather straightforward.

o Speak with advisors you trust and with your Reverse Mortgage provider to determine if the Reverse Mortgage might work for you.

o You must obtain “Third Party Counseling from a HUD approved counselor. This is required by the Government for your protection. It generally takes less than an hour either in person or often by telephone. You will be issued a Counseling Certificate. You will need this certificate to obtain your Reverse Mortgage but it does not obligate you in any way.

o Your provider will take your application.

o Your provider will help you obtain your appraisal. This may be your only “out of pocket” cost.

o Once approved, your closing can take place, usually at an office or at your home if required.

Reverse Mortgages are rapidly gaining popularity as the preferred choice for many senior homeowners. By having a better understanding as to how they work, now you – together with your most trusted personal advisors, can determine if a Reverse Mortgage is the right choice for you.

Expert Warns-Consumers Beware of Misleading Reverse Mortgage Articles and Stories!

Reverse Mortgages (Home Equity Conversion Mortgages) have become a popular and well respected way for seniors to access the equity in their homes for many reasons. Some use the equity for long-term care needs, to pay bills, pay off existing mortgages or debt, pay for prescription drug costs, home improvements, home modifications, or to simply be able to enjoy life a little more by traveling and enhancing their retirement cash flow. Many seniors use reverse mortgages to pay high property tax bills, and have even been saved from foreclosure and bankruptcy because they applied for a reverse mortgage.

Other seniors use reverse mortgage proceeds to fund advanced estate planning techniques. This includes increasing the value of their estate through life insurance purchases, planning ahead for future long-term care needs, assisting grandchildren with college funding, making charitable donations, and to convert IRA funds to Roth IRA funds, just to name a few.

Many newspaper, TV, radio and internet articles circulating in the media give inaccurate and misleading information about reverse mortgages. So called “experts” who are interviewed for quotes often have no involvement in the mortgage industry and do not understand the federal law that regulates these loans.

Each consumer should make it his or her own responsibility to talk with an expert, and educate themselves on the facts.

TIP: As you know, the media attract more viewers, readers, and listeners when they make a story exciting, scary, or dramatic. Because reverse mortgages are federally regulated loans, there really isn’t anything scary or dramatic about them when you know the facts. Be wary of interviews and articles that make reverse mortgages seem like a scam. The Department of Housing and Urban Development has done an excellent job of regulating reverse mortgages, and they are designed to help seniors, not hurt them.

Some good websites for more information are http://www.fanniemae.com – be sure to download “Money from Home” for free. The National Reverse Mortgage Lenders Association has great consumer booklets- http://www.reversemortgage.org .

The National Council on Aging recently did a study that concluded that reverse mortgages are good sources of funds for long-term care planning and long-term care needs. You can download the entire study by visiting http://www.ncoa.org

Although there are closing costs associated with these loans, most, if not all of them are factored in to the loan, and are not out-of-pocket expenses for the senior. Whether or not a reverse mortgage is right for a senior depends on their specific situation, case design, and cash flow or estate planning needs.

What is a Reverse Mortgage?

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

Who Qualifies for a Reverse Mortgage?

Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, co-ops are not allowed. Only the Financial Freedom “Cash Account” program is available on co-ops in New York City. As long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. There are no special income, credit or medical requirements.

How Are Seniors Protected?

Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure your family member understands the program, and review alternative options, before they apply for a reverse mortgage.

You can seek counseling from a local HUD-approved counseling agency, or a national counseling agency, such as AARP (800-209-8085), National Foundation for Credit Counseling (866-698-6322), and Money Management International (877-908-2227). Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone.

By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.

TIP: HUD Counselors are not financial planners, and should not be giving advice on financial product purchases. Talk to a trusted advisor about a plan for the reverse mortgage proceeds.

How Can the Cash Flow From a Reverse Mortgage Keep Mom and Dad at Home Longer?

The cash flow from a reverse mortgage can be used for any purpose. In order to keep seniors safe and at home for longer periods of time, it is recommended that the cash flow be used for home modifications, repairs, personal emergency response systems, and in-home care services.

Whose Name Remains on The Title to the Home?

The seniors’ names remain on the title to the home. The bank is not in the business of taking over title, and certainly not in the business of owning homes. Therefore, just as with a traditional mortgage, the seniors’ name is on the title to the house.

Can Their Home Be Taken Away from Them?

When a senior implements a reverse mortgage, it is important to remember that they are responsible for keeping the home owner’s insurance in force, paying annual property taxes, and for general upkeep of the home. Unless one of these criteria is not met, their home can never be taken away from them.

Will Heirs Be Responsible for Repaying This Loan?

No, a reverse mortgage is a “non-recourse” loan. This means that the lender is only entitled to loan repayment via the sale of the home for fair market value. If there is any remaining equity over and above the final loan amount, the heirs receive that remaining equity. If the home sells for LESS than the final loan amount, the federal government steps in and pays the lender the difference. Heirs’ assets are never at risk.

When Does the Loan Come Due?

The loan comes due when the last remaining homeowner leaves the home permanently. This means that the loan will come due when the last homeowner passes away, sells the home, or leaves permanently (12 months or more).

Do Reverse Mortgages Affect Medicare or Social Security?

Reverse Mortgages do not affect Medicare (including Medicare Part D) or social security income. However, the proceeds from a reverse mortgage CAN affect local income based programs in your area, and the big one- Medicaid. (note there is a huge difference between MediCARE and MediCAID.) Medicaid eligibility can be preserved with the right plan even after taking out a reverse mortgage. Talk to a professional about the options.

Can Mom and Dad Still Leave Their Home To Their Children?

Yes, with proper planning, they certainly can. One way to make sure that heirs receive the value of the home is for the seniors to purchase life insurance using the proceeds from the reverse mortgage. Some seniors end up doubling or tripling the value of their estate for their heirs because they use the reverse mortgage proceeds to pay the life insurance premiums. This way they never have to touch a penny of their savings, investments, or current income to increase the value of their own estate. This also helps the heirs, because inheritance passed on through life insurance (beneficiary designation) bypasses probate, and taxes!

How Does The Deficit Reduction Act 2005 Effect Home Equity?

The Deficit Reduction Act of 2005 requires that individuals with home equity over $500,000 ($750,000 in some states) use some of that equity to pay for their own care prior to qualifying for Medicaid services. Reverse mortgages have become a very popular and appropriate option for decreasing the equity in the home and using that equity to pay for care.

For more information or to contact the author visit http://www.theltcexpert.com