Reverse Mortgages as a Possible Answer

For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home-equity loan. But a conventional loan really doesn't free up the equity because the money has to be paid back with interest. A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person's lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title "reverse mortgage".

Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. Over the last five years the number of reverse mortgages nationwide has tripled. The uses of this untapped wealth are only limited by a person's imagination.

For those seniors who are less fortunate but own a home, a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.

A reverse mortgage is a loan against the equity in your home that provides you cash advances, but requires no mandatory monthly re-payments during the life of the loan. If the interest is unpaid, it is allowed to accrue against the value of your home. If you do choose to pay any portion of the interest, it may be deductible against income, as would any mortgage interest.

You must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home] in order to qualify for a reverse mortgage.

There are no income, asset or credit requirements. It is the easiest loan to qualify for.

A reverse mortgage is similar to a conventional mortgage. As an example:

* The bank does not own the home but owns a lien on the property just as with any other mortgage
* You continue to hold title to the property as with any other mortgage
* The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
* There is no penalty to pay off the mortgage early

The proceeds from a reverse mortgage are tax-free and available as a lump sum, fixed monthly payments for as long as you live in the property, a line of credit; or a combination of these options. These proceeds can be used for any legal purpose you wish:

* daily living expenses
* home repairs and improvements
* medical bills and prescription drugs
* pay-off of existing debts
* education, travel
* long-term care and/or long-term care insurance
* financial and estate tax plans
* gifts and trusts
* to purchase life insurance
* or any other needs you may have.

The amount of reverse mortgage benefit for which you may qualify, will depend on

* your age at the time you apply for the loan,
* the reverse mortgage program you choose,
* the value of your home, current interest rates,
* and for some products, where you live.

As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds.

The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries.

There are three reverse mortgage loan products available, the FHA - HECM (Home Equity Conversion Mortgage), Fannie Mae - HomeKeeper®, and the Cash Account programs. Over 90% of all reverse mortgages are HECM contracts.

The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to your withdrawal of additional funds.

You must participate in an independent Credit Counseling session with a FHA-approved counselor early in the application process for a reverse mortgage. The counselor's job is to educate you about all of your mortgage options. This counseling session is at no cost to the borrower and can be done in person or, more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.

Keeping money in a reverse mortgage line of credit will not count as an asset for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. However transferring the money to an investment or to a bank account would represent an asset and would trigger a spend down requirement.

If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time (unlike a traditional Home Equity Line whose credit limit is established at origination). If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt.

False Beliefs

* “The lender could take my house.” Homeowner retains full ownership. The Reverse Mortgage is just a loan with a lien, like any other mortgage. You can pay it off anytime you like.
* “I can be thrown out of my own home.” Homeowners can stay in the home as long as they live with no payment requirement.
* “I could end up owing more than my house is worth.” The homeowner can never owe more than the value of the home at the time the loan is due.
* “My heirs will be against it.” Experience demonstrates heirs are in favor of Reverse Mortgages.

The following material was taken from an article titled " The Future in Reverse" by Rosana Remakom

Live Free of Monthly Payments.
Cutting expenses is an issue for retirees living on fixed incomes. The most common use of a reverse mortgage is to pay off an existing mortgage, thereby eliminating what is typically the largest monthly household bill.

Avery Chenowith, a retired Marine Corps colonel, lives with his wife at Leisure World senior retirement community in Landsdowne , Va. Chenowith, 65, thought he had to pay off his first mortgage before he could think of getting a reverse mortgage. When he learned that wasn't the case, he used a reverse mortgage to pay off his condo and leave him without a mortgage payment for as long as he and his wife live there.

“Now, without that mortgage payment, we are saving $1,400 a month. That's $16,000 a year. We don't have a worry in the world, and as our money builds up, we can take trips abroad.”

Dream Come True.
In addition to eliminating mortgage payments, consumers can also draw on the equity in their homes. The cash can be used for just about anything: Buying a second home, taking vacations or realizing a lifelong dream—like buying a plane.

Thomas Hardington, 84, of Munhall , Pa. , had been flying planes since World War II. He belonged to a flying club when a friend offered to sell him a plane. His granddaughter mentioned the idea of a reverse mortgage as a way to purchase the plane.

“It sounded good,” Hardington says, “So we had the house appraised. It appraised at $149,000 and I got around $80,000.” Hardington used a portion of that money to buy his plane and the rest he tucked away in an escrow account. “The interest on the escrow account is more than what I could get in a bank,” he says. I'm thinking of buying a condo down in Naples , Florida and may use what I have in escrow to do that.”

Reverse mortgages may not be a fit for every situation, but they are worth considering. They can help people through a financial rough spot, provide financial security or a boost in lifestyle.

Put your home to work
When we think of mortgages, we think of borrowing money to purchase a home. You make a small down payment, borrow the rest of the money, and then make a mortgage payment every month over many years. As you do so, your mortgage decreases and your home equity increases.

Reverse mortgages are the flip side of this equation. Instead of making payments, you receive them. With each payment, equity is drawn from your home; your mortgage increases and your home equity decreases.

These payments can be divvied out to you in a lump sum, as a line of credit*, or through monthly payouts. According to the National Reverse Mortgage Lenders Association, the most popular option—chosen by more than 60 percent of borrowers—is the line of credit, which allows you to draw on the loan proceeds at any time. With a line of credit, you pay interest only on what you use. You continue to own your home, hold its title, pay property taxes, make repairs to the property and pay homeowners insurance.

The loan only comes due if you stop using your house as a primary residence, whether that is due to death, sale of the home or moving to a new primary residence. If the sales proceeds on the house equal more than the amount owed on the reverse mortgage, that excess money goes to you or your estate.

The loan also may be repaid at any time and doesn't hinge on the sale of the home. You or your heirs can pay off the loan and keep the home. And your repayment obligation will never exceed your home's value or sales price.

Within each loan program, the amount of money you are eligible for depends on your age, the current interest rate, and the value and location of your home. Generally, the older you are and the more your home is worth, the more cash you can get. Based on current interest rates (10-year T-bill was at 4.79 percent in mid-May), a 62-year-old with a $150,000 house could receive nearly $80,000 in a reverse mortgage. A 75-yearold could receive $96,719, according to the NRMLA's online calculator. These numbers represent the cash available after paying all associated fees. The loan amount also is subject to federal loan limits, which vary by county.

A Brief Summary of Reverse Mortgages

1. There are no income, asset or credit (except for current bankruptcy) qualifications
2. The borrower(s) must be at least 62 years old
3. The property must be the borrower's primary residence
4. The money is withdrawn tax-free, does not affect Social Security or Medicare benefits, and can be used for any purpose the homeowner wishes
5. The money can be received as a lump sum, a line of credit, a monthly payment, or any combination of these three options
6. There are no mandatory monthly repayments. Most programs can be repaid at any time without penalty (the interest may be deductible)
7. The title of the home does not change
8. The maximum loan amount is set by the lender