Top 5 Reasons People Get Reverse Mortgages

Top 5 Reasons People get Reverse Mortgages

Once you've done your research on reverse mortgages and gained a more complete understanding of the product, the next step is to decide if a reverse mortgage is right for your situation. If you're eligible (a homeowner 62 years of age or older with equity in your principal residence), this may be a quick decision or one that requires a bit more consideration. As with any decision, it's always helpful to get the perspectives and experiences of others who have faced similar situations and asked themselves the same questions. So for those other folks who have decided to get a reverse mortgage, what were their reasons? We've asked some of our readers and site visitors and below are the top 5 reasons people get reverse mortgages:

1. Retire in style! Most homeowners getting close to retirement age have spent that last thirty years or more making mortgage payments; depending on where you live, this monthly obligation could be anywhere from a few hundred dollars a month to a few thousand dollars a month and beyond - phew! Every month that one big check goes out the door to the bank and leaves you with that much less cash to save, invest or spend on the items you need and want. How great is it to finally turn the tables on Main Street Bank, where they now send you a check each month? Most retirees have steady monthly costs, such as housing, medical, insurance and other necessary expenses. For non-working retirees, those expenses are managed with a fixed income from retirement accounts, pension plans, social security or other plan. The reverse mortgage allows a retiree to increase their fixed income and provide cash to do some things that they might otherwise not be able to afford to do. Typically, the personal quality of life is the number one reason people get reverse mortgages.
    
2. Pay hospital or medical bills. For many older Americans and retirees, medical issues are an increasing reality in their daily lives. With the ever rising cost of healthcare, this can put tremendous demands on a fixed income. Ongoing medical treatments, prescription drug regimens, or a large one-time (possibly unforeseen) medical bill are all top reasons that people get reverse mortgages.
    
3. Improve or modify a home. While this may not be an expansion of the home, the early part of retirement is a great time to re-purpose your house to accommodate the way you will be living for the next ten, twenty, thirty years and on. Maybe it's time to expand the kitchen, widen the hallways or remove some steps, or exchange the old pool in the backyard for a beautifully landscaped garden. As we get older, a top reason people get reverse mortgages is to outfit their house for their new lifestyle.
    
4. Dream vacation. What better time to just get away than when your working days are behind you and the weather turns a bit gloomy? Proceeds from a reverse mortgage have allowed many homeowners to take that vacation they've always dreamed about, but never had the time or resources to take. Bon voyage!
    
5. Pay off high interest rate or problematic debts. With the large amount of debt that the American consumer accumulates over a lifetime, it should be no surprise that this is a top reason people get reverse mortgages. Whether it is high interest rate credit cards, a relative's student loan debt, or even a potential foreclosure that must be dealt with, reverse mortgages can be a very effective way to get a large sum of cash to manage other debts.

These are the top 5 reasons people get reverse mortgages. Once you've made a decision to move forward with a reverse mortgage, send us your top reasons and we'll add them to the list!

Cashing In On Your Home-

It's no surprise that reverse mortgages are becoming popular among seniors

Western Pacific Home Loans- Reverse Mortgages

For many of today's retirees, a home can seem like Fort Knox without the key. Escalating real-estate prices have caused many seniors' homes to skyrocket in value. But unless they're willing to sell, it may be an inaccessible gain during a time in their lives when extra income and liquid assets would be most welcome. There is a way to tap those profits--a reverse mortgage. "Many seniors are sitting on home equity they never dreamed of," says realty expert Tom Kelly, whose recent book, The New Reverse Mortgage Formula, is a guide to what a growing number of elderly homeowners see as a way to have their home and cash in on it, too.

A reverse mortgage allows a homeowner to borrow against the equity in a home, but unlike a home-equity loan, the loan and interest do not have to be repaid until the home is sold. The loan might be in the form of a line of credit that can increase over time and be drawn on as needed, a lump sum payout, a fixed monthly check for as long as you live in the home, or a mix of options. There is minimal or no upfront cost, as closing and other fees can be wrapped into the loan. The reverse mortgage also pays off any existing mortgage, ending that monthly bite on income. Cleo Dunn, an 88-year-old widow in Leawood, Kan., says the $1,200 a month she receives from her reverse mortgage supplements her Social Security check. That helps her pay medical and other bills while remaining in the home she loves. "I have this most beautiful garden," she says. "I have a life here I could not have anyplace else."

Reverse mortgages have been around for years, but it wasn't until the early '90s that they began earning respectability after the Federal Housing Administration started insuring the mortgages for repayment to lenders. Even so, they've been a niche product; only about 40,000 were done last year. But an aging population is expected to begin tapping into home equity more aggressively. New loans have doubled since 2003. Interest rates on reverse mortgages are mostly about 5.3 percent now but can also be about 6.5 or 8.5 percent, depending on the type and size of the loan.

Bolstering demand are seniors who see the loans not as a lifeline but as a route to a more active life. Francisco and Joanne Santana-Montez of Antelope, Calif., 69 and 68, will use their reverse mortgage line of credit to finance a dream trip to Cancun, Mexico. "Our adviser told us we're spending our kids' inheritance, but our children are delighted," says Joanne.

A prime consideration when getting a reverse mortgage: age. The older you--and a spouse--are, the more cash you can get since the loan will presumably be shorter in duration. A 75-year-old with a fully paid-off $250,000 home in suburban Cleveland, for example, might receive about $917 a month. Or, as is more popular these days, the homeowner would qualify for a line of credit of about $140,000. A 70-year-old Clevelander would nail down less, about $791 a month or a $130,000 line of credit; an 80-year-old would draw more, a monthly check of about $1,099 or a $152,000 line of credit.

Other variables, such as lending limits and interest rates, also determine how much of a home's equity you can borrow. But the homeowner can never end up owing more than the home eventually sells for, even if the sale doesn't cover the borrowing and accrued interest. If a sale more than covers the debt, you (or your heirs) get the excess.

About 95 percent of reverse loans, made by mortgage brokers and banks, are an FHA-insured home equity conversion mortgage, or HECM. The insurance enables HECMs to carry a low interest rate and yield more to borrowers, even with a fee included for the coverage. Impeding some borrowers are geographic limits on the amount of a home's value, regardless of market worth, that will be considered in the calculation. While a value cap of $312,895 applies in the Long Island suburbs of New York, for example, the lid for homes in Iowa is $172,632, according to Ibis Capital, a reverse-mortgage software and data firm in San Francisco. One result: A $300,000 home in Iowa that might qualify for a $100,000 line of credit could get $178,000 if it were in Long Island.

Handy help. Homeowners in costly abodes, perhaps $600,000 and up, may do better with the Cash Account reverse mortgage created by Financial Freedom Senior Funding Corp. in Irvine, Calif. Since there is no valuation cap, borrowing is unlimited. Mortgage giant Fannie Mae offers a reverse-mortgage option with a twist: A senior can buy a new home and get a reverse loan in a single transaction. AARP offers a calculator and a guide at aarp.org/money/revmort to help clarify the choices (and a free booklet for those who call 800-209-8085). Help is also available from Financial Freedom (financialfreedom.com ) and at reversemortgage.org , the website of the National Reverse Mortgage Lenders Association (866-264-4466 for a brochure by mail).

Reverse mortgages should be utilized with great care. That's why modern loans include consumer safeguards such as counseling. You're eating up equity in the home--funds you may later need for healthcare or sudden bills, or to move to assisted living. Closing costs and fees can make the deal costly if the loan is held for only a few years, especially if you use just a small part of the line of credit or opt for monthly disbursements. If interest rates trend higher, reverse loans will pay less to new borrowers and existing borrowers will rack up heftier interest charges.

The Reverse Mortgage: A Retirement Tool

If you own your own home and are at least 62 years of age, a reverse mortgage provides an opportunity to convert your home equity into cash. In the most basic terms, the reverse mortgage allows you to take out a loan against the equity in your home, but you don't have to repay the loan during your lifetime as long as you are living in the home and have not sold it. If you want to increase the amount of money available to fund your retirement, but don't like the idea of making payments on a loan, a reverse mortgage is an option worth considering.

How They Work With a reverse mortgage, a lender makes payments to you based on a percentage of the value in your home. When you no longer occupy the property, the lender sells it in order to recover the money that was paid out to you.

While there are several types of reverse mortgages, including those offered by private lenders, they generally share the following features:

• Older homeowners are offered larger loan amounts than younger homeowners. More expensive homes qualify for larger loans.
• A reverse mortgage must be the primary debt against the house. Other lenders must be repaid or agree to subordinate their loans to the primary mortgage holder.
• Financing fees can be included in the cost of the loan.
• The lender can request repayment in the event you fail to maintain the property, fail to keep the property insured, fail to pay your property taxes, declare bankruptcy, abandon the property, or commit fraud. The lender may also request repayment if the home is condemned or if you add a new owner to the property's title, sublet all or part of the property, change the property's zoning classification, or take out additional loans against the property.

HECM Loans Reverse mortgages have been around since the 1960s, but the most common reverse mortgage is a federally-insured home equity conversion mortgage (HECM). These mortgages were first offered in 1989 and are provided by the U.S. Department of Housing and Urban Development (HUD). HECMs are the only reverse mortgages issued by the federal government, which limits the costs to borrowers and guarantees that lenders will meet the obligations. The primary drawback to HECMs is that the maximum loan amount is limited.

Non-HECM
Non-HECM reverse mortgages are available from a variety of lending institutions. The primary advantage of these reverse mortgages is that they offer loans in amounts that are higher than the HEMC limit. One of the drawbacks of non-HECM loans is that they are not federally insured and can be significantly more expensive than HECM loans.

Total Annual Loan Cost
Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of your home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance, and the servicing fee. To assist borrowers in comparing mortgage costs, the federal 'truth-in-lending law' requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost (TALC). Do be sure to use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.

Income Options
HECM reverse mortgages provide the widest variety of income generating options, including lump-sum payouts, credit lines, monthly cash advances, or any combination of these.

The credit line is perhaps the most interesting feature of an HECM loan because the amount of money available to the borrower increases over time by the amount of interest. Non-HECM loans offer fewer income options. 

Interest Rates
The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. Borrowers have the option to select an interest rate that can change every year or one that can change every month. A yearly adjustable rate changes by the same rate as any increase or decrease in the one-year U.S. Treasury security rate. This annual adjustable rate is capped at 2% per year or 5% over the life of the loan. A monthly adjustable rate mortgage (ARM) begins with a lower interest rate than the ARM and adjusts each month. It can move up or down 10% over the life of the loan.

Conclusion: Plan Carefully
Taking out a loan against your home is a big decision that will impact your current finances and the estate that you leave to your heirs. There are substantial costs involved, including loan origination, servicing, and interest. You also need to remember that, with a reverse mortgage, your debt increases over time due to the interest on the loan. If you change your mind about the loan, or need to move out of the property due to health reasons, proceeds from the sale of the property are used to pay off the reverse mortgage. Depending on the size of the loan and the value of the property, there may be little or no money remaining after the loan is repaid.

Before taking out a reverse mortgage, you should research the topic thoroughly, compare costs from a variety of lenders, and read all disclosure documents. While investing the proceeds from a reverse mortgage is generally not advisable because of the need to recoup the costs of the loan plus the interest, the income from a reverse mortgage may provide an opportunity to refocus other elements of your investment portfolio. Prior to assuming the mortgage, consider the cash flow the reverse mortgage will provide and review the implications this new source of income will have on your overall investment strategy.

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Read more: http://www.investopedia.com/articles/04/120204.asp#ixzz1jIEHuXXf

What is a Reverse Mortgage…In Plain English.

Before You Can Learn What a Reverse Mortgage is, Let Us Start  by Talking About What It Is NOT. 

Reverse mortgages are not:

·         Just for the desperate

·         A trade for your home ownership

·         Free money from the government or any other type of entitlement program

In plain English, a reverse mortgage is nothing more than an equity loan secured by your home which is designed to defer the mortgage interest. It’s as simple as that.

The most common type of reverse mortgage is the HECM, which is the acronym for Home Equity Conversion Mortgage.  This product was created by the Federal Housing Administration in 1989.

While a traditional home mortgage requires the homeowner to make scheduled monthly payments over a specified term, (usually 30 years) the reverse mortgage interest is not due until the loan reaches maturity.  As long as the homeowner still resides in their property and pays their property taxes and insurance they can take advantage of not making monthly payments on the money they borrowed.

You Own your Home

With a reverse mortgage you continue to own your home, paying your property taxes and homeowners insurance just as before. Like any mortgage, you will receive a monthly statement which will outline all interest charges and balance information. The only difference will be the absence of a coupon to return your monthly payment as no payment is necessary.

What are the Qualifications?

Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current rates, and home value. There is no income or credit score requirements as there are no monthly repayments. You must continue living in your home as your primary residence and continue to pay your properties taxes and insurance.

You’re in the Drivers Seat

You can choose to make voluntary repayments of the mortgage interest in part or full without penalty. That’s right; you can make payments back on your reverse mortgage. You can also deduct that mortgage interest just as you would a traditional home loan and you can pay off the entire loan at any time with cash, refinancing or selling.

Some believe that once you get a reverse mortgage the bank will eat all of the homes equity leaving your heirs with nothing but a mound of debt. Wrong. While no one can predict your homes appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took.

How is the loan Repaid

Unless repaid voluntarily, the reverse mortgage is not due until the last surviving borrower passes away or fails to occupy the property as their primary residence. The heirs will have ample time (up to 12 months) to complete a sale or refinance transaction to pay back the balance of the loan.

If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. In the event that the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as a part of closing your reverse mortgage loan will cover your estate. The Lender will be reimbursed for any shortfall from the Mortgage Insurance fund.

Who is it for?

Anyone who has desires or needs that cannot be met with their current income levels. Reverse mortgages are a great tool to help you stay in the home you love or to simply enhance your retirement years.

Who is it NOT for?

Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges) it is not recommended for people who do not intend to live in their home for a reasonable amount of years to realize its benefits.

What About Taxes?

Cash received by any mortgage is not considered income and will not be taxed.

Required Counseling

The Federal Housing Administration wants you to fully understand the reverse mortgage and requires that all applicants receive independent 3rd party counseling by phone or in person. Once the counseling is completed you will receive a certificate of completion which is then signed and delivered to your lender of choice. 

Other Considerations

Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs based” state or local assistance. This is not specific to a reverse mortgage but as to any excess funds that could change the qualifications on these types of programs.

Like any mortgage it pays to shop around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitch “they’re all the same” or “we service our own loans”. The fact of the matter is ALL reverse mortgages carry the same safeguards, and there is only one federally insured HECM so don’t settle for less money or higher interest charges.




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Top Ten Things to Know if You're Interested in a Reverse Mortgage - HUD

Frequently Asked Questions about HUD's Reverse Mortgages

The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program, which enables you to withdraw some of the equity in your home.  The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more.  You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging at (800) 510-0301 or downloading their free booklet, "Use Your Home to Stay at Home," a guide for older homeowners who need help now. It is smart to know more about reverse mortgages, and decide if one is right for you!

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

2. Can I qualify for FHA's HECM reverse mortgage?

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.

3. Can I apply for a HECM even if I did not buy my present house with FHA mortgage insurance?

Yes.  You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage. 

4. What types of homes are eligible?

To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

5. What are the differences between a reverse mortgage and a home equity loan?

With a second mortgage, or a home equity line of credit, borrowers must have adequate   income to qualify for the loan, and they make monthly payments on the principal and interest.  A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments.  With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.

6. Will we have an estate that we can leave to heirs?

When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid.  All proceeds beyond the amount owed belong to your spouse or estate.  This means any remaining equity can be transferred to heirs.  No debt is passed along to the estate or heirs.

7. How much money can I get from my home?

The amount you may borrower will depend on:

• Age of the youngest borrower
• Current interest rate
• Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price; and
• Initial Mortgage Insurance Premium--your choices are HECM Standard or HECM SAVER

You can borrow more with the HECM Standard option. In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow.  If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow.  For an estimate of HECM cash benefits, select the online calculator from the HECM Home Page. Many online reverse mortgage calculators can provide you with an estimate of the amount of funds you can borrow.

8. Should I use an estate planning service to find a reverse mortgage lender?

FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender.  You can locate a FHA-approved lender by searching online at www.hud.gov or by contacting a HECM counselor for a listing.   Services rendered by HECM counselors are free or at a low cost.  To locate a HECM counselor Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you

9. How do I receive my payments?

You can select from five payment plans:

• Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term- equal monthly payments for a fixed period of months selected.
• Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
• Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.
• Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

 10. What if I change my mind and no longer want the loan after I go to closing?  How do I do this?

By law, you have three calendar days to change your mind and cancel the loan.  This is called a three day right of rescission.  The process of canceling the loan should be explained at loan closing.  Be sure to ask the lender for instructions on this process.  Mortgage lenders differ in the process of canceling a loan.  You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place.  In most cases, the right of rescission will not be applicable to HECM for purchase transactions.








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