A reverse mortgage can become a considerable financial aid to retired seniors, who live in a property they actually own. The equity accumulated in their homes can be converted into cash, but the title to the property remains with the owners.
The reverse character of the mortgage is a sort of a reverse playback of the regular mortgage you had before while buying your house out. You had invested a lot of work and money into your property when you were younger. Now you can count on something in return, if you want it. The usual purpose of such a deal is to supplement the decreased after the retirement income and attempt to maintain the habitual life-style without having to really deprive yourself of certain joys of life.
Reverse mortgages are only available to people over 62 years of age. As to other rather non-numerous limitations, they include the ineligibility of cooperative housing (in New York however, I hear they have developed certain plans for this type, too) and the amount of equity you have built in your home. There are neither income nor medical restrictions. Even if you still have some moderate debt on your regular mortgage, you may qualify for a reverse one, and actually use some of its funds to pay the former one off, for the reverse mortgage must always be in a first lien position.
You can choose the amount or the period over which you will be using the benefits of the mortgage, or you can drain your equity in your home completely. In the latter case you live in your house and receive the funds agreed upon as long as you live, even if the overall amount of money you’ve received from the lender exceeds the value of your home. What would you say to a deal like that?!! I’d say no, unless it’s my last chance to get some money for some bread.
I will explain myself. Even though a reverse mortgage can be a really good helper, it is so not the only way to assist you in paying your bills! The biggest advantage of all the other ways lies in the simple fact that things get to be done (not necessarily the harder way!!!), but you still own as much of your home as you bought out years ago when you paid off your regular mortgage. So if you need to have a window replaced, a reverse mortgage should definitely not be your first choice to acquire funding for the job. A lot of companies run special offers for seniors. Talk to them first, several of them, compare the options. It may well be that your window will be replaced at a very low price, or even for free.
Before any reverse mortgage application can be processed, the prospective borrower must (it is obligatory and free of charge!) first meet with an independent counselor. HUD oversees a network of counselors whose job is to review the transaction, answer questions, and suggest alternative options. Counseling is one of the most important consumer protections built into the program. It is required for all reverse mortgages and may be conducted face-to-face or by telephone. By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives (for example, organizations like the National Council on Aging (NCOA) offer a lot in the field); (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs (Medicaid, for example) and the impact on the estate or his or her heirs.
During this conversation you should not hesitate to ask questions on every issue you have doubts about. Everything must be cleared before you commit yourself (and your property) to the business, be certain you understand all the conditions that could make the loan due and payable! For example, what happens if you need to stay in a nursing home for a long time, but not permanently? This is one of the most important questions; different lenders have different regulations for a situation like this. The hitch here is the general rule of a reverse mortgage – the lender pays you only as long as you actually live in the property. Even a temporary (periods vary from lender to lender) failure to do so, can make the loan due and payable. As you retain title to your home, all property taxes, insurance, utilities, fuel, maintenance, and other expenses remain your responsibility, so, if you don’t pay property taxes or maintain homeowner’s insurance, you risk the loan becoming due and payable. What’s due and payable? Sell the house – repay the debt. Having nowhere to return to after 6 months in a nursing home is tragic. But it does not have to happen. If you choose carefully, read the fine print, listen to the advice of professionals and your family, nothing bad is going to happen to you and your home. After all, the purpose of the mortgage is to help you, not to get you into trouble.
A reverse mortgage offers three plans: (i) a lump sum payment, (ii) a line of credit, (iii) a regular monthly advance. Any combination of the three is possible. The amount of money you can get depends on your and your spouse’s (or other co-owner’s) age, the value of your property and the equity you’ve accumulated in it, the interest rate the lender is charging. Generally, the older you are and the more valuable (and less mortgaged) your home is the more money you can count upon. AARP provides a calculator to help you determine how much you might be eligible to receive. It cannot show how much you have to pay upfront to get access to the treasure, though.
Talking about charges. This is one of the down sides of reverse mortgages – they are very pricey. You have to pay a lot as closing costs and continue with smaller payments as a monthly servicing fee, insured plans charge insurance premiums, so if you are planning to keep the mortgage for a couple of years only, it turns into a very costly deal. You may be able to finance the servicing fees and the insurance premiums if you want to avoid paying them in cash, but if you do finance them, they will be added to your loan amount and you will pay interest on them. You don’t have to pay any cash towards the interest, though – it gets to be added to the overall growing balance of the mortgage. The interest rate of a reverse mortgage can be fixed or adjustable with typical for these two types differences. The interest is charged on the outstanding balance. The balance increases gradually by the amounts you receive from the lender and the interest accrued. That’s why the mortgage is called “reverse” – the balance grows and you owe more and more instead of a regular shrinking balance that pushes you eventually out of debt. It is not bad, it’s just how it works, and it works just fine for many people.
The safest way to get a reverse mortgage is to go for a federally-insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM). These mortgages are backed by the U.S. Department of Housing and Urban Development (HUD). All HECM lenders must follow HUD rules, so many of the loan costs including the interest rate will be the same no matter which lender you select. Some costs, like the origination fee, other closing costs, and servicing fees may vary, though.
The other option is a proprietary reverse mortgage. Proprietary mortgages are private loans backed by the companies that develop them; the proprietary Home Keeper MortgageSM from Fannie Mae is among them.
FHA’s Home Equity Conversion Mortgage (HECM) carries the lowest interest rate but it also has the lowest maximum values that vary by county. Fannie Mae’s Home Keeper has a higher interest rate but its maximum value limit is higher. The maximum value is actually the conventional loan limit. It doesn’t really refer to the maximum home value allowed, but to the maximum amount of equity that can be leveraged. Because of the larger draw and the higher interest rate, Home Keeper accumulates a bigger debt, but if you have no heirs that you care to leave some property to, Home Keeper would be the right choice. If, on the contrary, you want to preserve as much equity as possible, HECM is the better choice because of the smaller buildup of debt. Explore the line of credit option: you’re only borrowing what you need and when you need it. Unborrowed funds don’t chalk up interest expense and don’t add to the loan balance.
No matter what exactly kind of a reverse mortgage you select and with what lender, the federal Truth in Lending Act (TILA) is one of your best protections. TILA requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account. It is very important to know that you have the right to know all the details of the deal in advance. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.
The reverse mortgage is a “non-recourse” loan, i.e. the amount due can never exceed the value of the property, but it does use up all or some of the equity in your home, leaving fewer assets for you and your heirs. When the loan becomes due, the lender is repaid the sum of funds advanced plus the accrued interest, but never more than the value of the house. Lenders cannot attach other assets of borrowers or their heirs in the event that the reverse mortgage debt comes to exceed the property value. If there is any remaining value, it belongs to the homeowner or the estate. A “non- recourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
In conclusion I want to mention another option available to seniors willing to ensure some stable supplementary monthly income in their years of retirement – annuity. It may happen to be more profitable to take advantage of your reverse mortgage and withdraw the largest amount possible as a lump sum and use it to purchase an immediate annuity from a life insurance company. This may be the way to get the biggest monthly extra income, and it would continue for life, too. The disadvantage is, though, that buying an annuity may put all your money at risk if the insurance company turns out to be unreliable, so be sure to commit yourself only to a highly rated company. You can find immediate annuity quotes here, as well as the quality ratings of each company. This gives you another bunch of totals to compare and choose from. Generally, be cautious if anyone tries to sell you something like an annuity suggesting that a reverse mortgage would be an easy way to pay for it, because it may or it may not be so. It all requires calculation and comparison, as your total costs in this case would be the cost of what they’re selling plus the cost of the reverse mortgage. If you think you need what they’re selling, shop around before you buy.
Important! If you do take a reverse mortgage, you have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.
