Reverse Mortgages

A Reverse Mortgage could be just the ticket to enjoying a better quality of life in your retirement years.

Reverse Mortgages are helping older Americans across the country achieve greater financial security. Imagine having extra income every month for the rest of your life. Would the security of having an open Line of Credit with no repayment schedule give you peace of mind? Have you dreamed about a lifelong vacation but never seemed to have found the time or the money for it? All this and much more is possible by using some of the equity in your home as part of a well balanced retirement plan.

The thought of a reverse mortgage can fly in the face of reason at first glance. After all, most people have spent a good deal of time and effort trying to eliminate their mortgage. Is it the mortgage or the payments they’ve wanted to eliminate? For most, it’s the payments. So far so good, a reverse mortgage has no payments due during the term of the loan.
Many people consider their home as an investment. The trick has always been how to tap this investment without giving up the shelter aspect of the home. The traditional way of doing this has been to refinance to a larger mortgage or take out a home equity loan. The problem is, both of these options incur an immediate repayment schedule and in most cases extend the length of time payments need to be made. Just the opposite of what people want.

Encyclopedia Britannica defines investment as the process of exchanging income during one period of time for an asset that is expected to produce earnings in future periods. Thus, consumption in the current period is foregone in order to obtain a greater return in the future.
Is the future now? If so, a reverse mortgage allows you to get some of the equity out of your house and into your pocket without any repayment schedule for as long as you have the loan. The proceeds are tax free and can be used for any purpose you want.
What are the requirements in obtaining a Reverse Mortgage?
There are really just a few. The youngest borrower must be at least 62 and the home or condominium needs to be the primary residence to qualify for a reverse mortgage. In addition, the property must be maintained, taxes must be kept current and homeowners insurance must be in force for the loan to remain in place.

How does a reverse mortgage affect Social Security, Medicare or Pension benefits? The proceeds from a reverse mortgage do not affect any of these benefits but it’s always best to consult a financial advisor and or legal counsel. There is also no effect to SSI or Medicaid benefits as long as the monthly cash advances are fully spent every month and not accumulated. Guidelines do change so again please consult with a legal advisor and/or your local Agency on Aging.
How Much Money Can I Get?

The size of a reverse mortgage granted depends on the applicant’s age, the type of reverse mortgage sought, the home’s value, and the current interest rates. As a general rule the older the borrower and the more equity in the home, the larger the cash proceeds. Overall a reverse mortgage pays out anywhere from roughly 40% to 85% of the appraised value or FHA loan limit, whichever is smaller. The balance of the equity is retained in the house.
Currently there are three reverse mortgage products available. The government-insured Home Equity Conversion Mortgage (HECM), the Home Keeper product by Fannie Mae, and the Cash Account plan. The Cash Account product provides increased benefits for higher value properties (typically homes valued over $600,000).

The HECM product is insured by HUD and the FHA. This product represents over 90% of all reverse mortgages. HECM loan limits vary by community and are set by the FHA. The current loan limit for Hampden, Hampshire, and Franklin counties is $206,700 for a single family house. Loan limits in the Connecticut counties of Hartford and Tolland are $333,735 for a single family house.

How Can I Access the Money?

You can receive the proceeds from a reverse mortgage in any of 3 ways.
1. As a Lump Sum
2. As a Line of Credit
3. As a monthly Tenure for life or for a specific period of time.

You can also elect any combination of these. About 65% of the time people elect a Line of Credit and for good reason. The Line of Credit option for the HECM product has a growth factor. The unused portion of the Line of Credit grows at 2% more than the 1 year T Bill. This makes the current annualized growth rate almost 7%! It’s like having a tax free interest baring savings account that has a high growth rate with guaranteed security. This is an incredibly powerful feature of the Line of Credit option.

What Are The Costs?

The actual closing costs depend on the type of reverse mortgage you elect. A rough estimate for the most popular HECM reverse mortgage is about 5% of the appraised home value or the FHA loan limit, whichever is less.

Almost all costs of a reverse mortgage can be financed from the proceeds of the loan. These typically include an origination fee, closing costs, servicing fee and a mortgage insurance premium.
Why is there a mortgage insurance premium? The mortgage insurance is there to protect you. You are protected in the following way: All reverse mortgages are considered non-recourse loans. This means that no matter how high the loan balance grows, neither you nor your heirs ever owe more than the home’s market value at the time the loan needs to be repaid.
Servicing fees refer to a monthly fee charged by the lender to service your reverse mortgage. This is what’s called a “service set-aside” which is an estimate of the total monthly fees for the life of the loan. This estimated “service set-aside” is deducted from the proceeds you would qualify for and is set aside for the lender to pull the monthly fee from. There is no interest charged to you for this “set-aside” and if the reverse mortgage is refinanced, or paid off, any remaining “set-aside” funds are added back to your equity.
Closing costs are consistent with other types of mortgages and include lawyer’s fees, home appraisal, pest inspection, recording fees, etc. Origination fees are charged by the company who originates your reverse mortgage.
A free counseling session is also required by a qualified HUD office. There are several in the greater Springfield area. This counseling can be done via phone or in person.
Common Misconceptions
The lender gets your house. This is not true, the title always remains in the name of the borrower. When the loan is due, the borrower or the heirs pay back the cash advances and the accumulated interest.
All the value in your house gets used up. Although it’s true the loan balance increases with time as interest accrues, people forget that in most cases the home value also continues to increase with time. Generally speaking, this preserves the equity that remains after the reverse mortgage proceeds have been paid to the borrower.
You won’t qualify because of poor credit, lack of income, or poor health. This simply is not true, the loan is not dependent on any of these. It is true a credit report is run but only to check on potential government liens or tax liens.
You have to be mortgage free. Although the reverse mortgage needs to be in the first position you can use some of the proceeds to pay off the existing mortgage assuming it is less than the amount you’ll receive from the reverse mortgage. This eliminates your existing mortgage and your payment.
Only desperate people get reverse mortgages. At one time that may have been true. But today’s reverse mortgage borrower is more likely to get a loan out of want, rather than need. Furthermore, the ability to access tax free cash to put to work somewhere else has been a trait of savvy investors for years. In addition, a growing number of people take out reverse mortgages because they like the security of having a financial cushion or for planning future expenses. Don’t let an antiquated stigma keep you from getting the cash you want. After all, it’s your money.

Is a Reverse Mortgage Right For You?

Borrowers have many specific reasons for electing a reverse mortgage. Some are needs-driven, others can enhance the quality-of-life. AARP, in conjunction with HUD/FHA, completed a survey of homeowners who elected a reverse mortgage. Here are the results.

67% Hospital/healthcare costs

55% Repay existing mortgages

50% Reduce burden on children

50% Home repair/improvement

38% Pay property taxes

29% Daily expenses

14% Travel, something special

3% Gifts

Because it’s not a cheap loan, a reverse mortgage is not the best way to pay off a small debt. Again because of the closing costs, this is not a particularly good loan if you intend to occupy your home for less than 4 to 5 years.

Most people love their home. They’ve put a lot of themselves into it, perhaps raised a family there, have worked hard to keep it in good repair, lived, loved, laughed and cried there. The home is one of the largest financial commitments you make. And it represents one of the biggest and often overlooked sources of your financial health.

The ability to remain in your home while taking care of yourself financially is important to many of us. A reverse mortgage can give you that opportunity. If you could benefit from the extra cash to supplement your existing income, reduce credit card debt, cover medical expenses, help a loved one or just enjoy life a bit more, a reverse mortgage may be right for you.