Reverse Mortgage: Beneficial Home Equity Loan for Seniors? Know the Benefits and DrawbacksFitness Equipment
Most of us have seen commercials marketed towards seniors who might be needing some extra help, financially. These commercials advertise reverse mortgages, offering help to those seniors who own their own home and who otherwise might be having difficulty making ends meet.
What is a Reverse Mortgage? A reverse mortgage is a type of home equity loan which is only available to seniors who own their own home. It allows the homeowner to convert a percentage of their home's equity into cash. The release of the home equity (money given to the homeowner from the loan) can be either one lump sum payment or over multiple payments.
To Qualify for a Reverse Mortgage
- The homeowner must be at least 62 years of age.
- Own their own home outright, or
- Have a low enough mortgage balance that it can be paid off with the proceeds of the loan.
- Within the U.S., a reverse mortgage can be the only mortgage on the home. No other mortgages/reverse mortgages can be obtained unless the reverse mortgage has been paid entirely.
- The homeowner must live in the home.
- Within the U.S., the homeowner must receive consumer information from a Home Equity Conversion Mortgage (HECM) counselor, which is approved through HUD. This can be free but more often there is a charge of between $100-$125. This is a safeguard to protect the homeowner and his her family. (This applies to the primary reverse mortgage loan).
- A pending bankruptcy may slow the process of getting a reverse mortgage.
- (There are no minimum income or credit requirements).
Not all home dwellings can qualify for a reverse mortgage. The home must be a single family home or a 1-4 unit complex with one home being occupied by the borrower. Some condos or manufactured homes may also be eligible, though often with special requirements.
How Much will I Get with a Reverse Mortgage? This depends upon several factors:
- Your age at the time of the loan. Generally, the older the applicant, the more money he can receive.
- The appraised value of the property, including any repairs or existing liens.
- Within the U.S., the interest rate will be determined by the U.S. treasury.
- How the money is taken. For example, will the borrower get a lump sum or a monthly payment?
- A set maximum amount. This can depend upon the reverse mortgage loan product and due to the economy, may be decreasing.
There are 2 Reverse Mortgage Loan Products Available:
- FHA - HECM: This is by far the largest reverse mortgage product, making up more than 90% of all reverse mortgage loans. It is also government insured.
- Fannie Mae - Homekeeper: It offers different loans for seniors, meant to compete with FHA - HECM.
- (Cash Account by Financial Freedom was once a popular Reverse Mortgage product but it was suspended in June, 2008. Many sites still have this listed.)
How do I Get Paid with a Reverse Mortgage? Different programs have different options available depending on your need. The FHA / HECM gives five options:
- Tenure - Equal monthly payments for as long as one of the borrowers is alive and occupies the property as a principal residence. This often allows for a lower interest rate and larger borrowed amount.
- Term - Equal monthly payments spread out over a fixed number of months.
- Line of Credit - Unscheduled payments or installments taken out at the time the borrower chooses until the amount borrowed is depleted.
- Modified Tenure - A combination of the Line of Credit along with monthly payments for as long as the borrower resides in the home.
- Modified Term - A combination of the Line of Credit along with monthly payments for a fixed number of months as determined by the borrower.
Other programs also may sometimes allow for the loan to be received as one lump sum. This tends to have the highest interest rates along with the smallest amount to be borrowed.
What are the Benefits of a Reverse Mortgage?
- Unlike a traditional home equity loan, the borrower cannot lose his home in a foreclosure to the bank for not paying the loan. (However, the borrower can still lose his home if he does not pay property taxes, though this can also happen if he does not have a reverse mortgage.) FHA is looking into ways to help seniors pay their taxes. With regular mortgages, this often happens in escrow.
- The banks do not own the home. Rather, they own a lien on the home. The homeowner holds the title.
- The loan on the home is not due payable until the borrower no longer occupies the home as a permanent residence. This happens when the borrower either permanently moves out of the home, sells the home or dies.
- Depending on the type of loan, the money can be used for most purposes and for most of the borrower's needs.
- With an FHA/HECM reverse mortgage, the mortgage is government (FHA) insured. In addition, with this mortgage, the borrower can never own more than the value of the home nor can he pass on debts from the reverse mortgage to his heirs.
- A reverse mortgage is NOT taxable income. The IRS does not consider loan advances to be income. Therefore, the money, in itself, from the loan will not be taxed. (Any interest/dividends you get on this money can be taxed, though).
- AARP conducted a survey of those who had taken out reverse mortgages. 93% said that they this had a mostly positive effect on their lives.
Any Drawbacks? Oh yes. These should be considered before taking out a reverse mortgage.
- Cost - Getting a reverse mortgage can be very cost prohibitive. These can easily cost more than $15,000 to get into.
- Confusion - There is criticism that many seniors may not fully understand their loans. Though again, 93% were happy with their reverse mortgage.
- Compound Interest - This one can be a doozy. Remember, the borrower is not making monthly loan payments. Therefore, the interest which accrues is treated as a loan advance. For each month of the loan, the interest is not only calculated on the initial amount borrowed but also on interest already assessed in the loan. For that reason, the longer the borrower has the reverse mortgage, the less equity will be left in the home by the time the borrower moves or dies. There may even be no equity left at that time. (This brings me to my next point).
- Inheritance - Though reverse mortgage companies love to say how, once you have moved or died, your estate will repay the loan along with any interest which was accrued, the truth is that there may not be much of an estate left if most or all of your home's equity was used in the loan. With the compound interest, a senior could easily use up all of the equity even if the initial loan was not terribly high. *** The good news is that, with an FHA - HECM loan, the borrower's heirs will not have to worry about owing more than the value of the property, nor can the bank come after the heirs for any other debts from the reverse mortgage.
- Moving - Many borrowers may assume that they will never leave their home until they die. The truth is that they may need to move, perhaps to an assisted living community or in with relatives, at some point prior to the time that they may have chosen to pay off that reverse mortgage. Anything which is still owed will be due once they move. This means that they will need to make payments or lose their home to foreclosure once they are no longer living there. Whereas this might not matter if they are moving into a nursing home or hospice, it might matter if they are still needing to have good credit, perhaps for another home. The assumption cannot be made that their home's equity will have increased enough to pay the reverse mortgage upon selling that home. The longer they have the reverse mortgage, the more compund interest will be charged along with the loan.
- Forgotten Fees - Most of us pay our property taxes with Escrow from the mortgage, if we have a mortgage. Otherwise, we must remember to pay those taxes once a year lest we lose our home in a tax auction. This can be a high amount, especially if one is not making monthly payments. Many seniors may not adequately figure in this amount when determining the reverse mortgage. With so many people defaulting on their taxes, in part due to the poor economy, the government is starting to crack down. Whereas you cannot lose your home to foreclosure due to the actual reverse mortgage loan, you can lose your home to foreclosure if you do not make your tax and/or insurance payments on time. FHA and Fannie Mae have both been told they need to crack down on this, due to an extreme budget shortfall in reverse mortgages. Most sites, even now, stress how the borrower cannot be foreclosed upon. Obviously, this is not entirely true. Any senior wishing to get a reverse mortgage should ask specifically about money for required insurance and property taxes, lest they lose their home.
If you or someone you know wishes to learn more about a reverse mortgage, a good first step might be to contact HUD about this. They should be able to answer your questions and help you find the right professionals. In addition, it is worth looking into what the overall amount of the loan will be, with interest, 5,10 and 20 years down the road.
I hope you appreciated this article. If so, you might also like:
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Thank you. I always appreciate any questions or comments.