Reverse Mortgage

Understanding Reverse Mortgages

There are few financial options that are generating as much interest with seniors these days as reverse mortgages. At the same time, there are few concepts that have generated as much confusion and erroneous information. Are these programs a good deal or are they loaded with conditions that favor the lender at the expense of the homeowner?

These are important issues if you are considering ways to enhance your financial situation as you prepare for retirement and especially if you are already retired and living on a fixed income. The right decision with regard to managing your home equity could do more to enhance your retirement planning than almost any other financial decision you make.

The good news is, given accurate information and sound advice, reverse mortgages are not difficult to understand, to evaluate and, if appropriate, to incorporate in your financial plan. This information is intended to help you understand the basics as you investigate the potential advantages of using a reverse mortgage to enhance your financial position.

This is a very exciting time in the history of the reverse mortgage because of the incredibly rapid pace of change. This versatile financial tool is currently being infused with new capabilities. Based on extensive experience I can assure you, a reverse mortgage could be the Swiss Army Knife in your financial toolkit!

Reverse Mortgage 101

Currently, the Home Equity Conversion Mortgage (HECM) is the only reverse mortgage program generally available to the public although there may be a resurgence of other reverse mortgage programs in the future that may be suited to specific situations where they serve needs that are not addressed by the HECM as in the case of very high-value properties.

In general, a HECM reverse mortgage:
Is for homeowners, 62 years of age and over
The amount of equity you can access depends, in part, on age. The older you are, the more money you qualify for. The age of the youngest person on title will determine how much money you are able to receive. Other factors that determine how much money you mar receive are current interest rates and your home’s appraised value up to the current FHA lending limit of $625,500.

Is available for owner-occupied homes that are fully paid-for or currently mortgaged
You do not need to own your home free-and-clear to consider a reverse mortgage. In fact, one of their most popular uses is the elimination of a monthly mortgage payment. As an example, a retired couple on a fixed income with a $1,200 per month mortgage payment would give themselves a $1,200 a month raise in terms of cash flow when they replace their current mortgage. Many seniors that could not afford to retire because of a mortgage obligation have been able to do so after eliminating their monthly payment through a reverse mortgage.

Covers several property types
A HECM can be used on owner-occupied single-family and multiple-family residences of up to four units as well as condominiums that meet FHA guidelines. Multi-family properties may be leased out as long as the owner occupies one of the units. Disallowed properties include: cooperative units, manufactured housing built before 1976 or lacking permanent foundation, bed and breakfast properties and boarding houses.

Requires no repayment as long as at least one of you live in the home
Once you have a reverse mortgage, you will never be required to make another mortgage payment as long as at least one of the people on title continues to live in the home.

Has no income or credit requirements
The reverse mortgage is secured only by the property so your employment status or credit scores do not matter.

Does not incur income tax on proceeds
Since a reverse mortgage taps into existing home equity, the proceeds are not taxed as income. You should always consult your tax advisor when making any changes to your financial situation.

Leaves title to your home in your name - you can sell it at any time or leave it to your heirs
A reverse mortgage is no different than any other home mortgage. You retain title to your home so you are free to pay off the reverse mortgage, sell your home, or leave it to your estate. At the time that the reverse mortgage is retired, you or your estate will pay off the balance by selling or refinancing the home. All retained equity after the reverse mortgage is paid off belongs to you or your heirs.

Is a non-recourse loan – you can never owe more than the property is worth
There is no recourse to you, your estate or your heirs if the loan balance exceeds the home’s value at maturity. Whether you are downsizing, moving to assisted living or your home has passed to your estate, there is no requirement to make up any shortfall. On the other hand, all equity remaining in the property after the reverse mortgage is retired belongs to you or your estate.

Provides proceeds as a lump sum, monthly payment, line of credit or any combination
You decide how you want the payout from your reverse mortgage to be structured. You can request all or part of the available proceeds as a lump sum a line of credit (except in Texas) or either a guaranteed monthly payment for as long as you live or live in your home (Tenure Payment) or a Term Payment that will give you higher monthly income for a specific period of time. Many homeowners choose to take some cash at closing, put some into a line of credit so that it can be drawn on when needed and also set up a monthly payment. You can change the structure of your payout options at any time in the future for a nominal fee.

Can be variable-rate or fixed-rate
Until recently, all reverse mortgages were variable-rate products. Most lenders now offer a fixed-rate option. The fixed-rate HECM does not offer monthly payment or line of credit options: all available proceeds must be distributed to the homeowner in a lump sum at closing.

Includes mortgage insurance
A mortgage insurance premium (MIP) equaling 2 percent of the maximum claim amount (lesser of the home value or county lending limit) is part of the closing cost, plus an annual premium thereafter equal to 0.5 percent of the loan balance. The MIP guarantees that if the loan servicer goes out of business, the government will step in and assume the obligation so that you have continued access to your loan funds. The MIP also guarantees that you or your heirs will never owe more than the value of the home at the time that the reverse mortgage is retired.

Does not affect Social Security or Medicare
Your reverse mortgage does not normally affect payments you receive from Social Security, nor should it affect your Medicare coverage. A reverse mortgage can affect government assistance programs such as Medicaid so you should consult your attorney or accountant before deciding on a reverse mortgage if you plan to make use of this type of assistance.

Requires that you complete a counseling session with an authorized third party
Counseling by a HUD approved independent third-party is required for all borrowers undertaking a reverse mortgage as a consumer protection. Counseling may be conducted face-to-face or by telephone.

Can be used for home purchase
The Housing and Economic Recovery Act of 2008 (HERA) paved the way for home purchase financing via the HECM as of January 2009. The advantages to purchasing a home with HECM financing are many and are covered in the next section.

HECM for Purchase

The option to purchase a home with no income or credit qualifications and no monthly payments provides powerful leverage to anyone who can meet the down payment requirement.

In general, the HECM for Purchase:

Is subject to the same guidelines as traditional HECM loans
The same age requirements, terms and conditions and property types apply as well as some additional requirements that are specific to HECM for Purchase as listed below.

Requires a down payment at closing from an allowable funding source
HECM purchasers will be required to make a down payment at closing that will generally be larger than the down payment required for conventional financing, however: it will be the only required monetary outlay to own the property other than the traditional costs of homeownership such as property taxes, insurance and upkeep. In general, the older the purchaser, the lower the down payment. Allowable funds include the purchaser’s assets and exclude loans and credit card advances. Gifts from family members are allowed with the execution of an FHA-approved gift letter.

Is subject to the following additional conditions
•    The purchasers must occupy property within 60 days
•    Newly constructed properties must have certificate of occupancy
•    Purchase offers are contingent on satisfactory inspection conducted by qualified inspector
•    The purchasers may cancel transaction at any time prior to closing.
•    HECM for Home Purchase is not currently available in all states.

© Monte Howard, 2009 All rights reserved.