Using a reverse mortgage to buy a vacation home in the Cayman Islands sounds like one of the worst uses for the federally overseen program meant to help older homeowners either fund their...
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By Kirk Haverkamp
Updated and reviewed Jul 5, 2013
Financial publications report that our nation is currently in the worst economic climate since the Great Depression. Many have encountered financial difficulties. Senior adults are no exception. Many have experienced a serious loss of income and drop in their standard of living. For some seniors, the availability of reverse mortgages has been the lifeline that has kept them financially afloat. These loans allow them to convert a portion of the equity they have in their homes into cash.
Things a Senior Adult Must Know Before Seeking a Reverse Mortgage Loan
- What is a reverse mortgage? It is a special kind of home loan that requires a person be age 62 or older in order to qualify. Unlike other loans, this type does not have to be repaid as long as the home is the borrower’s principal residence.
- The borrower must own the property outright or have only a small mortgage. He must not be delinquent on a federal debt. There are no credit or income requirements for the borrower.
- There are reverse mortgage lenders who specialize in this type of loan. They are members of the National Reverse Mortgage Lenders Association and should be licensed to make this type of loan in the borrower’s state.
- There are two types of reverse mortgage loans. Privately sponsored ones may bring a higher loan amount and lower costs. There is also a type of Federal Housing Administration (FHA) reverse mortgage. These Home Equity Conversion Mortgages (HECMs) typically have a lower interest rate and are insured by the federal government. Another benefit is the borrower will not owe more than the value of the loan, even if the loan exceeds the home’s value.
- A strength of reverse mortgage loans is that potential borrowers must attend an approved consumer information counseling session led by well-experienced pros who help them understand and work through the process.
- Several varieties of homes qualify for reverse mortgages single-family homes, condominiums, townhouses, 2 – 4 unit properties with one unit occupied by the owner/borrower and manufactured homes that meet FHA requirements. Farm homes and most cooperative housing type homes are ineligible.
Questions of Immediate Concern
- “How much money can I get?” is one of the first questions people ask. There is no hard-and-fast answer. The amount for which a borrower qualifies depends upon his age (or the age of the younger spouse, when a couple applies), the current interest rate and the appraised home value. HECM reverse mortgage loans have a maximum amount available based on the area in which the borrower lives. Generally speaking, the older the borrower and the more valuable the home, the larger the loan can be. There are reverse mortgage calculators available on the Internet that will estimate how large the loan can be. Any member of the National Reverse Mortgage Lenders Association can also give an estimate.
- “For what can I use the money from this type of loan?” Basically, it can be used for anything. These loans are often used for remodeling, to pay down debt, to pay off an existing conventional mortgage, for medical care or simply to enhance the standard of living.
- “How can a person receive the funds from a reverse mortgage loan?” There are five choices. A borrower must choose the option that benefits him most. He can change his payment option later for a fee of $20.
- Term Equal monthly payments for the number of months selected by the borrower.
- Tenure Equal monthly payments for as long as the borrower lives and occupies the property.
- Line of Credit Unscheduled payments at the times and in the amounts chosen by the borrower until the line of credit is exhausted.
- Modified Tenure A combination of line of credit and monthly payments for as long as the borrower lives in his home.
- Modified Term A combination of line of credit and monthly payments for a pre-selected number of months.
- A concern of potential reverse mortgage loan customers is, "Can the lender take my home if I live longer than anticipated?” The answer is “No, and no payment needs to be made as long as you live in the house, keep the taxes and insurance paid and maintain the house."
- "How are these loans repaid?" Repayment is made when the borrower dies or no longer uses the home as his principal residence. At that time, there are two choices. The borrower’s heirs can sell the house and repay the loan from the proceeds. Funds from the sale in excess of the loan amount become part of the borrower’s estate. Otherwise, the heirs may choose to repay the loan and receive a free and clear title to the property.
- “What are the costs and fees of an HECM?” Most of the costs of a government HECM can be paid by financing them and having them paid from the loan amount, so they will not have to be paid as out-of-pocket expenses. Fees include an origination fee, closing costs, interest, servicing fees and a mortgage insurance premium.
Are Reverse Mortgages Too Expensive?
Reverse mortgages are now wildly popular because the senior citizen population they serve is growing faster than any other demographic group in the entire U.S. But some critics argue that reverse mortgages cost too much to make them a suitable retirement planning vehicle.
Reverse mortgages are loan products that allow homeowners over 62 to get paid for their accumulated home equity. The homeowner doesn't pay a mortgage; instead he receives payment from the lender in exchange for a stake in the value of the home. Seniors can choose to receive their money in a lump sum, monthly installments, a line of credit or, depending upon the reverse mortgage terms. a combination of means and methods. Because the homeowner isn't paying off a loan, there are no minimum income requirements to meet like those associated with traditional mortgages.
Baby boomers candidates for reverse mortgages
Baby Boomers-defined as people born after 1945-make up about 30 percent of the country's population. There are 78 million Americans in this demographic, and the first of them turned 60 in 2006, representing the largest-ever segment of American society to hit retirement age. That means that they're all potential candidates for a reverse mortgage, and companies are heavily marketing these products to them in order to take advantage of that fact. But critics point out that the reverse mortgage rates offered by most lenders are prohibitively expensive. That's mainly because, as the homeowner takes equity payments, the mortgage interest is tacked onto the balance of the loan, creating a scenario in which interest gets paid on top of interest.
Reverse mortgage rates may be low compared to other mortgage rates, but because of the way the interest is compounded, they become expensive over time. Then there are the other costs involved in setting up a reverse mortgage. Borrowers often have to pay origination and appraisal fees, the cost of a title search, and additional mortgage insurance premiums. Fortunately, a newly enacted law will change some of that in favor of the borrower by limiting origination fees on reverse mortgages to 2 percent of the loan up to the first $200,000, and 1 percent of the rest, with a cap at $6,000.
Alternatives to reverse mortgages
Selling a house, moving into a less expensive home, and investing the profits may be a more appropriate strategy for some homeowners. The AARP, for example, suggests that home equity lines of credit or loans are less expensive if the homeowner has enough income to manage the monthly payments. For those who are much older than 62, however, the higher cost of the reverse mortgage rates may not be a big deal because they won't be paying those steeper mortgage rates for too long.
Choices regarding the financial sense of a reverse mortgage have to be made on an individual case-by-case basis. Seniors should pay heed to mortgage rates when making their decisions.
Four Misunderstandings about Reverse Mortgages
If you've ever dissected your telephone bill, you know that it's filled with a bucketload of charges that you never knew existed. You thought you were paying $XX per month, but when the bill comes, you'll discover additional fees for universal service, subscriber line charges, and excise and communication taxes. If you call to complain, they'll tell you that you misunderstood the way phone companies charge.
Reverse mortgages, which let seniors over age 62 convert a portion of their home equity into cash, have lots of hidden traps and fees attached to them, as well. Many people don't fully understand how reverse mortgages work, so they don't apply for one, even though it would be a good choice. Others misunderstand how the entire process works, but agree to them anyway. If you're considering a reverse mortgage, here are four common misunderstandings.
1. It's a home equity loan
Yes and no. With both a reverse mortgage and a traditional home equity loan, you turn a portion of your unused equity into cash. That's where the similarity ends. With the latter, the bank gives you cash, and you immediately begin paying it back. With a reverse mortgage, you never make payments until you move or pass away. Also, to qualify for a traditional home equity loan, you must have income, low debt, and a good credit rating. With a reverse mortgage, those factors are irrelevant.
2. Your heirs will lose their inheritance
A common reverse mortgage misunderstanding is that the bank owns your home, and your heirs lose their rights to inherit it. This is false. You retain title to your home, unless you sell it or pass away. If you die, your heirs will inherit the property, and they must pay back the reverse mortgage either through selling the home, or from their own funds. If they sell, they'll keep all money in excess of what you owe the bank.
3. You can get unlimited funds
The amount of money that you can withdraw is dependent on the appraised value of your home, how much equity you have, and your age. Generally speaking, the older you are, the more money will be available to you. If you choose an FHA-insured reverse mortgage (HECM), which accounts for 80 percent of the market, there are limits on how much you can withdraw.
4. You can lose your home
As long as the home remains your primary residence, you cannot lose it. You'll never be required to pay back more than your home is worth. Neglect is the only exception. If you don't properly maintain your home, or don't pay homeowner insurance or property taxes, the lender can demand that you pay back the loan. If you can't afford it, you may have to sell.
Once you understand how a reverse mortgage works, you can apply for one with complete confidence. And with the additional funds, you'll always be able to afford the fees for your ever-escalating phone bill.
Six Top Tips for Reverse Mortgages
As America's population ages, reverse mortgages are growing in popularity as a means for older homeowners to tap into their home equity for needed income. In order to best manage a reverse mortgage, it helps to understand them thoroughly, and follow a few basic tips and guidelines.
The increasingly popular, but rather exotic, "reverse mortgage" lets older homeowners take advantage of the value of their homes without actually selling their property. Many seniors use a reverse mortgage to supplement retirement and social security income, pay for healthcare, make home improvements, or fund travel and leisure activities.
Here are six helpful tips for those interested in reverse mortgages:
1. It may pay to wait.
You can usually qualify for a higher income stream of monthly payments if you're older. Depending upon your situation, it may be worthwhile to postpone the mortgage, just as it's sometimes more lucrative to postpone retirement in order to boost social security and pension plan payouts.
2. Ask lots of questions.
Understand the terms of the mortgage, ask questions until all the small print is comprehensible, and be careful not to violate important terms of the agreement that could have negative repercussions. Don't nullify the mortgage unless it makes powerful financial sense.
3. Primary forever.
If you sell your home, or no longer use it as a primary residence, you'll need to repay the cash that you received from the reverse mortgage lender, plus interest and other fees. You get to retain the remaining equity in your home, assuming there's any left.
4. One as good as two.
Typically, you don't need to repay the loan if one of the borrowers named on the mortgage continues to live in the house, and keeps the taxes and insurance paid up and current. If a spouse dies or moves into a healthcare facility, don't panic. You're probably still eligible for the reverse mortgage's original terms and conditions.
5. Do it yourself.
Don't pay a third party vendor to help direct you to a lender or mortgage broker. These estate planning services sell information that you can get by yourself for free, so it's a waste of your money.
6. Payout is key.
There are several different ways to get money for your home equity through a reverse mortgage, and choosing the most appropriate method is one of the most important decisions you'll make. Figure out whether you want equal monthly payments, a line of credit you can draw on when needed, or a combination of monthly checks plus a standing line of credit. You can also elect to get all of the money as a lump sum payment.
Once you've got a game plan that suits your needs, shop according to the plan that suits you best to find the most attractive deal from the most reliable lender. Consult a real estate attorney with experience in reverse mortgages before signing any documents, and then look forward with confidence to a more carefree retirement.
Reverse Mortgages Help Seniors in a Challenging Economy
While most exotic mortgage products marketed in the past 10 years resulted in loss and crisis, the much-maligned reverse mortgage has bucked the trend. Although it's a rather misunderstood instrument, the reverse mortgage has emerged as a savior for many seniors who are strapped for cash.
The reverse mortgage used to get lumped in with predatory loan products and high-risk negative amortization mortgages. Recently, however, it has regained popularity and stature thanks both to new reverse mortgage guidelines meant to protect seniors, and efforts to better inform consumers about how reverse mortgages work. The fastest-growing segment of the American population is now either past retirement age or about to enter it. That means that the reverse mortgage, which is available only to homeowners who are at least 62 years old, is poised to become one of the most demanded mortgage products of all.
Lifeline for seniors
In the wake of recent economic events that have wiped out the savings, assets, and pensions of millions of seniors, the reverse mortgage has gained even more credibility. The fact is that the reverse mortgage is one of the only reliable ways for retirees to gain access to money needed to pay bills and survive the financial crisis. Others are using their reverse mortgages in lieu of retirement plans that have become obsolete due to catastrophic losses in the stock market. As these seniors discover exactly how reverse mortgages work, they're getting a pleasant surprise and much-needed reassurance and confidence. That's because when used appropriately, the reverse mortgage is loaded with attractive benefits.
Benefits of reverse mortgages
Lenders generally don't consider credit history with reverse mortgages, focusing instead on the balance remaining on any existing mortgage and the market value of the home. Under President Obama's new economic stimulus package, the limits on reverse mortgages have been raised from $417,000 to $625,500, which gives seniors with more valuable homes the opportunity to draw down more cash. New federal reverse mortgage guidelines also cap fees and provide credit counseling.
With a reverse mortgage, the lender makes payments to the senior homeowner, based on the property's equity when the reverse mortgage is put into place. Homeowners usually stay in their residences and use the income stream to pay bills. But under newer reverse mortgage guidelines, it's also possible for homeowners to use a reverse mortgage to buy another primary residence. That makes it feasible to buy a new home without making monthly payments or having to sell a home in today's lackluster market.
Seniors can choose to be paid in one of four ways: through a lump sum; through a monthly cash advance; through a line of credit to be taken out at any time; or via a combination of these methods. Even if the value of the home declines, the total debt will never exceed the property's value. The reverse mortgage company will incur any losses, not the homeowner or the homeowner's heirs.
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New Disclosures to Help Explain Reverse Mortgages
Reverse mortgages can be complicated financial products that many borrowers find hard to understand. To help clear things up, the Federal Reserve is proposing a new set of disclosures to provide a better understanding of the costs and risks associated with them.
Key among them is eliminating a longstanding method of illustrating the potential costs of a reverse mortgage and replacing it with something more straightforward. The Total Annual Loan Cost (TALC) method has been in use for two decades, though few homeowners seem to understand how it works.
Fed Announces New Mortgage Rules to Protect Consumers
New rules designed to prevent loan originators from steering borrowers into more costly mortgages in order to increase their own compensation have been issued by the Federal Reserve.
The Fed also issued temporary rules requiring that borrowers be informed how their mortgage rates and payments may vary over time, and proposed new rules establishing enhanced consumer protections and disclosures on reverse mortgage products.
HUD Help for Seniors: A Lower-Cost Reverse Mortgage
When William Shatner played Captain Kirk on the Starship Enterprise, he was a young hunk guiding people to boldly go where no man has gone before. Now, the 79-year old senior citizen is guiding people to better financial sense by saying, If saving money is wrong, I don't want to be right! The Federal Housing Administration (FHA) must be listening, because they've just lowered the upfront costs of reverse mortgages, which will help seniors save money when they tap their home equity.
Understanding reverse mortgages
Reverse Mortgages for Second Homes Gain Momentum
Until recently, reverse mortgages for primary residences were only available through a few regional banks. However, some national lenders have started offering them for second homes, as well. The trend may offer a welcome alternative to refinancing for those who want to extract equity from investment property without selling it.