Recommend Article Article Comments Print ArticleShare this article on FacebookShare this article on TwitterShare this article on LinkedinShare this article on DeliciousShare this article on DiggShare this article on RedditShare this article on PinterestExpert Author Frank W. Miller
While Reverse Mortgages may not be for everyone, they can be an excellent choice for many. Are they the right choice for you? Let’s explore them in more detail.
What is a Reverse Mortgage?
o A Reverse Mortgage is a special, Government sponsored program designed specifically for homeowners over the age of 62. Unlike a traditional mortgage, there are no monthly payments to make. There are also no credit, asset or means requirements to qualify for the mortgage. This can be an important factor for seniors with less than sterling credit or for those living on reduced retirement incomes.
o Various programs are available with different rates and benefits. There are fixed and variable rate programs, each having different features. While most are still Government Programs, proprietary programs with individual banks have also been available from time to time. While you should always use the broker or bank that you feel most comfortable with, be sure they can offer you the most competitive programs.
o Under a traditional mortgage the monthly payments pay for the interest, and usually pay off principal on the loan, thereby reducing the amount of the mortgage. With the Reverse Mortgage the amount of cash you receive, together with the interest and other charges, are added to and increase the loan balance. This balance however, never has to be re-paid until you move out of your home. You do have to keep your taxes and insurance current and maintain the home, just as you already do.
o A Reverse Mortgage is a non-recourse loan. This means that no assets other than your home can be attached to pay off the mortgage. If, when the mortgage comes due, the mortgage amount is greater than the value of the home, the homeowner or estate will only be responsible for fair value of the home unless the home is taken over by a family member, in which case the entire mortgage amount may be due. In other words, a sale must be at “arms-length” or the full loan value may be due.
Should the value of the mortgage be less than that of your home, either you or your estate receive the remaining equity in the home when you leave or pass away. Taken together, these features offer what could be considered a “Win-Win” situation.
Your mortgage balance becomes due when you sell the home, when you vacate it for more than 12 months, or when the last surviving borrower passes away. On sale, it is satisfied at closing, as would be any other mortgage. Your heirs will have the options of paying off the amount due and keeping the home, or of simply selling the home and receiving any remaining equity.
Who can benefit from a Reverse Mortgage?
Seniors I have found most likely to benefit from the Reverse Mortgage would be homeowners who:
o May be struggling with the payments of a conventional mortgage or equity line of credit.
o Require or would like additional cash for rising expenses.
o Would like to access the equity in their home for needed repairs, a new car, medical or other specific needs.
o Homeowners seeking to age at home and who are not planning to move from the home in the foreseeable future.
o Seniors who would rather share with children or grandchildren while still around to see them enjoy it, rather than leave the home’s equity in an estate.
o Senior homeowners who are facing foreclosure because of their inability to pay their current mortgages may find the Reverse Mortgage an excellent, if not the only option allowing them to remain in the home.
o Seniors who simply “want to’ have more fun!
When may a Reverse Mortgage not be for you?
The initial closing costs of a Reverse Mortgage include the insurance which allows it to offer these benefits. While defined by the Government, these costs need be considered. Closing costs come out of the proceeds (no cash is required), but they will immediately impact the equity remaining in the home. The program is not designed as a short term program. When the initial costs are averaged over a longer period of time they are usually considered reasonable but if you are looking to move from your home in a short period of time, other options may be more attractive.
There is really no reason for seniors who are already comfortably meeting their financial desires to obtain a Reverse Mortgage other than for possible estate planning purposes.
Who Qualifies for a Reverse Mortgage?
Qualification for a Reverse Mortgage is pretty simple.
o The age of the homeowner/s must be age 62 or greater.
o The home must be and remain being, the primary residence. You have to live there.
o The home must be in good repair. The home will be appraised during the loan approval process.
o There can be no other liens on the home. (Current liens or mortgages can and must be satisfied from the proceeds of the Reverse Mortgage.)
How do you access the cash?
With a Variable Rate loan, you can access your cash in one of four ways. They are:
o Lump Sum – a single payment of cash.
o A Line of Credit – You can use or pay back as you like.
o Monthly payments, either term or tenure.
o Any combination of the above.
Monthly Tenure payments continue for as long as you (or your co-borrower) reside in the home, even if you have taken out more money than the home eventually ends up being worth.
With a fixed rate program, you are usually required to take all available proceeds at closing.
Other Reverse Mortgage Considerations
The proceeds received are not considered income, therefore no income tax is paid on them nor will they affect Social Security or Medicare benefits.
Proceeds may affect Medicaid, SSI or rarely other benefits. Homeowners receiving such benefits should consult with a professional or their provider to determine how any such proceeds should be handled.
While proceeds are not taxable, neither is the interest a tax deduction until it is repaid, usually at the end of the loan.
So how much money can you get?
The amount you are able to receive from your Reverse Mortgage is based on four factors. They are:
o The Age of the youngest homeowner.
o Current Interest Rates.
o The Appraised Value of the home.
o The Reverse Mortgage Maximum Limit in force.
For an analysis of how much money a Reverse Mortgage would provide, do-it-yourselfers can access a website calculator at http://www.rmaarp.com/ Your Reverse Mortgage provider will also be happy to provide you with a more detailed analysis.
How do I get a Reverse Mortgage?
The steps to obtaining the Reverse Mortgage are rather straightforward.
o Speak with advisors you trust and with your Reverse Mortgage provider to determine if the Reverse Mortgage might work for you.
o You must obtain “Third Party Counseling from a HUD approved counselor. This is required by the Government for your protection. It generally takes less than an hour either in person or often by telephone. You will be issued a Counseling Certificate. You will need this certificate to obtain your Reverse Mortgage but it does not obligate you in any way.
o Your provider will take your application.
o Your provider will help you obtain your appraisal. This may be your only “out of pocket” cost.
o Once approved, your closing can take place, usually at an office or at your home if required.
Reverse Mortgages are rapidly gaining popularity as the preferred choice for many senior homeowners. By having a better understanding as to how they work, now you – together with your most trusted personal advisors, can determine if a Reverse Mortgage is the right choice for you.
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