What is a Reverse Mortgage?

Posted by David Edwards under For Buyers, For Realty Professionals, General Information, Credit Scoring, Mortgage Market Updates, Tax, Loans

A Reverse Mortgage is a home loan which allows you to borrow from the equity that you have built up in your home over time. Unlike other loans or lines of credit, as long as you live in your home, you do not have to make any payments on the money you borrow.

Who is eligible?
Any homeowner who is at least 62 and has substantial equity in their home is eligible to obtain a reverse mortgage. Your income, credit score or health history are NOT used to determine eligibility, making almost all senior homeowners eligible.

How much money can I receive?
Your Reverse Mortgage amount is determined by the following factors:

· Age of the borrower (age of the youngest borrower if more than one)

· Appraised value of the home

· Current interest rate

How do people use the money?
You can use the money any way you wish. Many use the funds from a Reverse Mortgage to pay for home improvements, in-home care, health-related expenses, property taxes and insurance, or to generally improve their standard of living above what Social Security provides. Often times, seniors obtain a Reverse Mortgage for the sole purpose of paying off their current mortgage, eliminating their monthly payment.

When does the loan have to be paid back?
Reverse Mortgages do not have to be paid back until the last surviving borrower dies, sells the home, or moves out. The total amount owed at the end of the loan equals all funds borrowed, plus accrued interest, servicing costs and mortgage insurance.

Are Reverse Mortgages safe?
The Housing and Urban Development (HUD) and Fannie Mae Reverse Mortgages are regulated by the federal government. Unlike regular loans, Reverse Mortgages do not have monthly payments. Your home cannot be foreclosed upon because of late payments. When the loan is paid off, you can never owe more than your home is worth.

How do interest rates affect my loan?
The interest rate is calculated using a formula set by the federal government. The interest rate at the time of closing is the initial rate for the loan. Ninety percent of the Reverse Mortgages obtained in the United States are done so with the FHA Monthly Adjustable program. A fixed rate option is also available and may be appropriate in some situations.

Are there any costs associated with Reverse Mortgages?
There are fees associated with obtaining a Reverse Mortgage. These costs can typically be financed into the loan itself, which means there are generally no out of pocket costs required. You will receive a "Good Faith Estimate" with your application, showing the precise costs of your loan. In most cases, these fees will be lower than standard sales commissions and moving expenses if you were to sell your home.

Is a Reverse Mortgage the best option for me?
This depends on your individual circumstances. If you are planning to sell or move out of your home in 1-2 years, or if you only need a small amount of money, a Reverse Mortgage may not be the best option for you because of the up-front costs.

Who holds title to the home?
The homeowner retains title to the property and can sell, payoff, or prepay the Reverse Mortgage at any time without penalty. The Reverse Mortgage lender does NOT hold title or take possession of your home when you or your heirs pay off the loan.

How can I receive the money?
You may choose from 4 options or a combination of these:

· A credit line that grows over time

· A single lump-sum disbursement

· Equal monthly payments for as long as you or a co-borrower live in your home

• Equal monthly payments for a fixed period of time

Are the funds you receive considered income?
The money you receive is a loan and is not subject to federal income tax. Additionally, these payments will not affect Social Security or Medicare payments. There are no income or asset requirements for borrowers receiving a Reverse Mortgage, nor are there any medical or insurance requirements. Be sure to consult your legal and tax advisors regarding your tax options.

How do I get started?
As a safeguard for seniors, you are required to attend a counseling session through a HUD-approved counseling agency. Lenders are required to provide you with a list of 5 counselors, two of which must offer the session by telephone. Before or after this counseling session, you can then make application with your lender and begin the loan process.
REVERSE MORTGAGE HIGHLIGHTS

· Must be 62 or older

· No income, credit or health qualifications

· Repayment is required only when you no longer live in your home.

· Proceeds from the loan are tax free and can be used for any purpose.

· You can never be asked to pay back more than the value of your home.

· You maintain ownership. The lender does not take control of title.

· If they choose, heirs can keep the home once the Reverse Mortgage balance is paid in full.

· All liens must be paid off at closing

• Closing costs can be financed in most cases.

Myths about Reverse Mortgages
The lender will own your home - FALSE!
You and your family or your estate retains ownership of the home. The lender does not take control of the title. The lender's interest is limited to the outstanding loan balance.

Reverse Mortgage lenders just want to sell your house - FALSE!
Reverse Mortgage borrowers may remain in the home for as long as they wish. However, should they decide to sell the home for any reason, the loan would become due and payable 12 months from this date.

Your heirs will be saddled with the loan - FALSE!
A Reverse Mortgage is a non-recourse loan. The lender does not have recourse to anything other than your home; not your income, other assets or your heirs.

You need a certain level of income, good credit, or good health to qualify - FALSE!
A Reverse Mortgage has no income, credit, or health requirements.

You have to make monthly payments on your Reverse Mortgage - FALSE!
There are never any monthly payments. Payment of taxes, insurance and general upkeep of the home are the only responsibilities of the homeowner.

Your home must be debt free to qualify for a Reverse Mortgage - FALSE!
You may have a mortgage or other debt on your home. However, any debt or mortgage(s) must be paid off first with the proceeds of the reverse mortgage.

Only the "cash poor" or desperate senior citizens can benefit from the Reverse Mortgage - FALSE!
Even though some seniors may have a greater need, a Reverse Mortgage can also be an excellent financial or estate planning tool for many seniors.