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Reverse Mortgage

DEFINITION

EXPLANATION

What is a Reverse Mortgage?

You may or may not have heard of the term reverse mortgage. In a recent study completed by the National Reverse Mortgage Lenders Association, those 62 and older that own their homes hold $6.5 trillion in home equity.  So what does this mean, and how can you get access to this type of funds? Well, summing it up, the definition of a reverse mortgage is essentially a loan. Those who own their homes and are 62 or older that have a large amount of home equity in their home are able to borrow against this. This can be done in a fixed payment received monthly, a single large payment, or a credit line.

The difference between a reverse mortgage and a forward mortgage, or regular mortgage is that the owner of the home does not need to make any payments for this loan type.  This loan is instead put on hold for payments until the owner of the home passes away, moves from the home, or sells the home. The loan cannot exceed the total value of the home due to the structure of the transaction which is set up by federal regulations. This is done in a way that the person was borrowing or the estate responsible for the borrower is not held responsible for more than the home is worth. Ways that the amount of a reverse mortgage can be higher than the value of the home is if the market value of the home drops or if the borrower loan lasts many years.

For seniors, a reverse mortgage can be a great option for obtaining the cash they need when the value of their home is where most of their net worth is tied up into.  However, it is important to take caution, as these loans can be complex as well as costly, and worse, are often a way to fall victim to scams. In this, we will do our best to help you understand this type of loan, understand how it works, and how you can protect yourself when you choose to get this type of credit or decide if it is the right loan for your parents or yourself.

How Reverse Mortgages Work

The way a reverse mortgage operates, the lender will make payments to the borrower, unlike most loans which the opposite is true. The person that owns the home will get to choose how they receive the payments, and they will only pay interest on the proceeds that they received. The owner of the home will not have to make any payments up front as the interest for this type of loan is rolled in the loan. The owner will also be allowed to keep the title of the home. The equity of the home decreases over the time of the loan and the debt of the owner of the home will increase.

The way that a reverse mortgage is similar to a regular, forward mortgage is that the home is put as collateral for both of these types of mortgages. The lender receives the proceeds that are gathered from the sale of the home in order to pay the fees, principal, insurance, and interest for the mortgage. If there is any remaining balance after all fees are paid the balance will go to the owner of the home, if they are still alive, or to the estate of the owner, if they have passed on.  There are some situations where the heirs pay off the mortgage themselves in order to keep the home.

The proceeds that are from a reverse mortgage are not able to be taxed. To the IRS the money counts as a loan advance, despite how it may feel like an income to the owner of the home.

Types of Reverse Mortgage Options

There are three kinds of reverse mortgages. Out of the three, the most popular is the mortgage known as a home equity conversion, which is also known as HECM. This represents just about every type of reverse mortgage that is offered to a lender for home values that are below $700k, and this is the type you are most likely to receive. If your home value is above this amount then you will want to look into what a proprietary reverse mortgage, or jumbo reverse mortgage, is. With a reverse mortgage, there are six different ways to receive your funds.  These options are:

▏            Term Payments- A borrower receives an equal amount of monthly payments from a lender for a time period that is set by the borrower.

▏            Equal Monthly Payments- A lender will make a set of payments so long as a borrower remains in the home, and it needs to be their main residence.

▏            A Line of Credit- Interest for this line of credit is only due to the amount that is borrowed from the line of credit. This money is made available to the owner of the home as needed.

▏            Term Payments Plus A Line of Credit

▏            A borrower receives monthly payments for a set term, then after that term, they have access to a line of credit if they need more money.

▏            Equal Monthly Payments Plus A Line Of Credit-  A borrower receives a  monthly payment.At any point, the borrower has access to a line of credit for more money.  This lasts so long as the borrower stays in their home.

▏            Lump Sum- The borrower is given all proceeds in one single amount.  This option, unlike the other six, does not come with an adjustable interest rate and instead has a fixed rate of interest.

There is also a type of reverse mortgage that is known as a HECM for purchase, this type of reverse mortgage can be used to purchase a home that you do not currently own.  In order for a person to qualify for a reverse mortgage, you need to have at least 50% equity in your current home’s value, not the price you paid for it. The standards can vary for this as well, based on the lender you choose.

How to Know If You Will Benefit From A Reverse Mortgage

So the question now becomes whether or not a reverse mortgage will benefit you in your situation. It is quite similar to a line of credit or an equity loan for a home as it allows for you to take out a lump sum of credit that can be accessed as needed based on the amount you have paid off on your home and what the market value of the home is.  The difference is that for a reverse mortgage, your credit or the amount of income you have does not apply. The other main difference is that you do not make any payments for this type of loan so long as you are an occupant of the home

This method is the only way that you can access the equity of your home without selling the home. A senior, who doesn’t want to make monthly payments or cannot qualify for an equity loan on their home due to bad credit or low cash flow, is the perfect choice for a reverse mortgage applicant. There are not many other options available for a senior that doesn’t qualify for any of these loans. The only other viable option would be downsizing by selling your home or allowing your grandchildren or children to purchase your home and essentially rent from them.

Benefits and Potential Fallbacks of a Reverse Mortgage?

After the age of 62, a reverse mortgage can be a great way for a senior to get cash if their home equity is their largest asset. A reverse mortgage helps  a person to continue living in their home. The person will need to keep up with the maintenance, insurance, and property taxes and will not be able  move out of your home for any reason. It can be a great way to help you meet your living expenses.

Be careful though, as a reverse mortgage is you spend a fair amount of your home’s equity in loan fees and interest, which can ultimately lead to you being unable to pass this home on to your heirs. A reverse mortgage that only provides a short-term solution to the financial problems that you are experiencing, and not the long-term, it may be better not to use a reverse mortgage in this case.  If you get a reverse mortgage and a relative or a friend is living with you, that person will no longer have a right to live there if you pass away. There is also a possibility of outliving the money you receive from the reverse mortgage which means you may not have the money you need when you need it.

Reverse Mortgage Rules

Any home, townhouse, condo, or manufactured home that was made after or on June 15th, 1976 can qualify for a reverse mortgage. The rules from FHA, or the Federal Housing Administration, state that owners that are cooperative cannot obtain a reverse mortgage as they technically own shares for a corporation and do not own the real estate itself.

Despite the fact that reverse mortgages do not check credit scores and there are no income requirements, there are still some rules in regards to who can qualify for a reverse mortgage. The person applying must be at or over the age of 62, own the home completely or have at least 50% equity in the home. A borrower will pay an up-front insurance premium, loan servicing interest, origination fee, ongoing mortgage fees, and premium. There are certain restrictions.

A lender is not able to go after the heirs of the borrower if the home is underwater when it comes time to sell. The lender is also required to give the heirs a few months to make a decision on what to do for the loan, pay it off or sell the home.  Those interested in getting a reverse mortgage are required to complete a counseling session that is HUD approved.  HUD or the Department of Housing and Urban Development implemented this to prevent unknowing parties from making bad financial decisions. The session takes around 90 minutes to complete and costs roughly $125. This session covers the good and bad in regards to getting a reverse mortgage and will cover your unique financial situation as well as personal circumstances. This will likely cover the ways a reverse mortgage may affect your Social Security Income as well as your Medicaid eligibility.  Your counselor will also likely go over the different methods of receiving the funds with you.

You will be held responsible to stay on the property and keep current on all insurance and property taxes, as well as keep the home in good repair. When you stop living in the house for a full year, even if is due to medical reasons then you will need to repay the loan, which is often done by selling the property.

Reverse Mortgage Fees

HUD has also made adjustments to the premiums for insurance relating to reverse mortgages back in 2017. Lenders are no longer able to ask the heirs or homeowners to pay up if the balance of the reverse mortgage loan balance exceeds the value of the home. Insurance premiums now offer a fund for this purpose so that a lender does not lose money when this occurs.

Another change that was made was to the up-front premium, which was raised to 2.0% from 0.5% for three-fourths of borrowers and there was a decrease for the other one percent of borrowers to 2.0% from 2.5%. At first, it was set up that if you took out more money, then you paid a higher rate. It is now setup so that all borrowers will pay the same rate of 2.0%. The rate for the up-front premium is connected to the value of the home so say your home is worth $100,000, you would pay $2,000 in an up-front premium.

An annual mortgage insurance premium is also required to be paid by all borrowers. It was once 1.25% of what is borrowed but has now decreased to 0.5% of the amount that has been borrowed. This change alone is one that has saved borrowers a total of at least $750 a year for each increment of $100,000. It also helps to even out the higher cost of up-front premiums. The debt will also grow slower this way, helping to preserve the equity of the homeowner, and offering funds at a later date or allowing the home to possibly be passed on to the heirs.

Lenders of Reverse Mortgages

A reverse mortgage is a special type of loan and cannot be gotten by just any lender. There are only certain lenders that offer this type of loan. There are some top names when it comes to getting a reverse mortgage, with companies like One Reverse Mortgage, Liberty Home Equity Solutions, and American Advisors Group being the most well known.

Just like with any loan, i you should always check multiple companies. This way you can determine which has the lowest rates and fees for your reverse mortgage. Lenders still have leeway when it comes to what they are able to charge, despite the fact that reverse mortgages are regulated federally.

Interest Rates for Reverse Mortgages

All options for reverse mortgages, besides the lump-sum option, offer adjustable rates. This makes sense when you think about it, as you are borrowing money over time with the others, and not just getting the money all at once. The rates would need to be adjustable for the others are interest rates are constantly changing.

Reverse mortgages that have variable rates are connected to the LIBOR, or London Interbank Offered Rate. These will add a margin of 1-3% of points to your base rate. So, for example, when a lender has a margin of 3% and LIBOR is at 1.5%, this will make your rate for your reverse mortgage be at 4.5%.

How Much Can Be Borrowed?

The amount received by the borrower from the lender for the reverse mortgage really depends on the lender you choose and the payment plan you pick. For something like a HECM, the proceeds allowed to be borrowed depend on how young the youngest borrower is at the time of the deal. As well as the interest on the loan and the lower price your home is appraised at. It can also be based on a maximum payment based on the FHA’s regulations, which is usually around six-hundred and seventy-five thousand dollars as of 2018. Obviously, 100% of your home’s worth can’t be borrowed, or anywhere in the ballpark for that matter. On top of that, an amount of your home equity is used to pay for items like interest and mortgage premiums.

Here are a few facts to keep in mind:

▏            Loan money received is judged by the age of the youngest borrower. If the borrower is married then that age is based on their spouse if the spouse is younger, even if the spouse is not a borrower.

▏            A lower rate of mortgage is better because it means you can borrow more.

▏            The more your property is worth in the appraisal, the more you can get in the loan.

▏            A good financial assessment is required to get a good amount of a loan out of a reverse mortgage, as the lender won’t hold back any for property taxes or insurance for homeowners on the borrower’s behalf.

The initial principal limit is what determines how much money you can borrow from the lender. In January of 2018, the average amount for this was around two-hundred and eleven thousand dollars at the minimum. The maximum claim number was sitting around four-hundred and twelve thousand dollars. Their percentage of the average amount of initial principal limit is right around fifty-eight percent compared to the maximum claim amount.

Back in October 2017, the government lessened the initial principal to make it more difficult for younger homeowners to get reverse mortgages. It is better for younger homeowners to further build up their home equity anyways. That is not the only reason they did this, though. In the past year, funds just about doubled for the mortgage deficit fund. They raised the mortgage premiums over the past year for the same reason. This insurance fund pays back the lenders while protecting taxpayers from the losses of reverse mortgages gone wrong. You also cannot borrow the entire amount of your initial principal limit throughout the first year if chosen to use a line of credit or a lump sum of money. Rather, you can borrow about sixty percent or slightly more if used to pay off a forward mortgage. If the lump sum is chosen then the amount received up front is all that will ever be received. A line of credit is preferred but the line of credit will only grow if there are unused funds in your account.

What Reverse Mortgage Means To Your Family

First of all, if you are married then both you and your spouse have to consent to a reverse mortgage loan to get it, yet both do not have to be borrowers. This type of arrangement can eventually cause problems. As morbid as this is, if the borrowing spouse dies first, then their spouse could lose their home at that point. The sale of the home is generally how a borrower will repay the debt of a reverse mortgage. A costly refinance is one of the few ways for the surviving spouse to retain the home. Grandma might not appreciate this in her old age. There are other ways to repay the loan but generally, the home must be sold if for no other reason than you would not have needed a reverse mortgage if you had that kind of money in the first place. Typically, only one spouse is the borrower if they are the only one on the property’s title. If the borrowing spouse has to move into a nursing home or assisted living center for more than a year, then their spouse who is not a borrower can still lose the home as this breaks the reverse mortgage contract.

Reverse Mortgage Scams Are A Thing

Reverse Mortgages are a lucrative business and way of making a lot of money in a hurry. Some folks find them shady as it is but there are also real scammers out there for them. Many borrowers for reverse mortgages are in ill-health and may not be one hundred percent mentally. Scammers always try to take advantage of this group of people and they’re not about to stop now. Beware of “financial advisors” and shady family members who might use the reverse mortgage to get money for themselves. Some more personal scammers will tell an older relative to take out a reverse mortgage and then a life insurance policy with them as the insurance beneficiary. Finally, don’t let a home improvement contractor tell you a reverse mortgage is a good way to pay for a home remodel that you don’t really need.

Avoiding Foreclosure With A Reverse Mortgage

▏            Yes, foreclosure is still a possibility even with a reverse mortgage. Typically, this happens when the borrowing party fails to retain the conditions stated in the reverse mortgage contract. This means that they did not do one of the following:

▏            They failed to keep up with homeowner’s insurance payments.

▏            They did not stay living in the home they took out the reverse mortgage on.

▏            The home and property were not maintained, thus the value dropped dramatically.

▏            Property taxes must be current.

You are required to live in the home as well as maintain it and the rest of the property so that the value of the property stays the same or goes up. Homeowner’s insurance is a requirement for reverse mortgages and regular mortgages alike. This is mostly in case of fire or other unfortunate damage to your home. Be sure that you do not skip or short change when paying your taxes. Your local tax authority will take your home from you if you do this.

The Bottom Line On Reverse Mortgages

While a reverse mortgage could be a helpful tool for elderly homeowners, it is not for everyone. It is definitely not for younger homeowners and it is not even for every older one. Make sure you fully understand a reverse mortgage before you sign on the dotted line. It could be the difference between have a home and being homeless. You’d be better off living frugally and tight on cash than with no cash and no roof over your head. Be wary of financial “advisors” or don’t tell you all the dangers and risks of reverse mortgages. They want your money even more than you do and they do not care if you don’t like unpleasant surprises. Even a reliable lender approved reverse mortgage, this is still a complicated matter that requires your full attention. At last, make sure you confer with your spouse and family before you go signing your autograph to any reverse mortgage forms. You will definitely be glad that you did.

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