Reverse Mortgages for Seniors

Reverse mortgages are becoming popular in America. Reverse mortgages are a special type of home loan that lets a homeowner convert the equity in his/her home into cash. They can give older Americans greater financial security to supplement social security, meet unexpected medical expenses, make home improvements, and more.

If you're a senior person looking to cash out home equity without having to worry about monthly payments, a reverse mortgage is what you may need. If you'd like to know how a reverse mortgage can help you and what it's all about, reverse mortgage information is given below:

What is a reverse mortgage?

Reverse mortgage (reverse equity mortgages) is a home loan which provides you with steady flow of tax-free income either in installments or in lump sum. Since the loan provides easy flow of cash, therefore it is the preferable choice of seniors in the US as well as in UK, Canada and even in India.

Who Can Qualify for a Reverse Mortgage?

Anybody over the age of 62 who owns a home can qualify for a reverse mortgage, if there is adequate equity in the home.

  • Existing mortgage(s) will be paid off.
  • Deferred maintenance / repairs will be required, if necessary.
  • FICO scores do not apply and credit history is irrelevant.

How Much Do Reverse Mortgages Cost?

Like with a regular loan, borrowers pay fees to get the money. These fees can be rolled into the loan and financed. Because there are no "standard charges," the fees will vary depending on the lender, third-party vendors and the type of loan selected. Basically, borrowers pay for:

  1. Mortgage insurance premiums. This insurance pays for a loss to the lender if your home is worth less than the amount owed at the end of your loan.
  2. Monthly lender fees. Lenders typically charge the borrower to disburse monthly payments.
  3. Loan points or application fee. This fee increases the lender's return on investment.
  4. Normal closing costs. Fees to close include charges for recording, escrow or closing agent, title policy, etc.
  5. More Info...

How Much Can You Borrow?

The amount of loan available depends on the type of loan program selected, how much equity remains after paying off existing mortgages and the borrower's age.


How does a reverse mortgage work?

It's just the reverse of a traditional mortgage which requires monthly payments. With a reverse mortgage, your debt accumulates as the bank doesn't collect the payments till the loan period ends or you or your heirs sell. Here are the 5 things you should be aware of before you apply for reverse equity mortgages.

  1. How to get the cash: 
    You can receive the reverse mortgage loan funds in different ways.
    • The lender or the company can provide you with a single payment.
    • You may ask for monthly cash advances.
    • You can apply for a credit-line account which gives you the opportunity to withdraw a required amount of cash whenever you are in need.
    • The lender may allow for a combination of monthly cash advances as well as "credit-line account".
  1. Reverse mortgage limit: 
    The maximum loan amount offered ranges from $200,160 to $362,790 depending upon the county you are in. However under the New Housing Bill, 2008 the loan limit has been raised to $417,000. For high housing cost areas, the limit is further raised to $625,000. However, the loan amount that you may qualify for depends upon the factors given below:
    • Age of the youngest borrower
    • The appraised value of your home
    • The equity built up in your home
    • What loan program you choose
    • Option by which you get loan funds

Besides the above factors, the loan limit may also depend upon current interest rates and closing costs on home loans in your area.

  1. How to qualify for the loan: 
    Unlike other loan options, there is no minimum income or credit requirement to qualify for reverse mortgages. However, if you have unpaid debt on your home, it should be paid off before you apply for reverse mortgages or else pay it off as soon as you get the loan proceeds.
  1. Loan types you can apply for: 
    You'll find a variety of loan products available in the market. They're the FHA-insured Home equity conversion mortgage (HECM), Home Keeper Mortgage offered by Fannie Mae approved lenders, and others. You need to compare the programs and decide upon the one that suits you.
  1. Reverse mortgage interest rate: 
    These loans are mostly adjustable rate mortgages with the rates adjusting on a monthly, semi-annual or annual basis. The rates are usually based on the 1 year U.S. Treasury (T-Bill) or the LIBOR index. However, you'll also find fixed rate HECMs offered by certain lenders. However, rate changes do not affect the proceeds you get; rather it affects the amount you owe.

What are the benefits of a reverse mortgage?

The main benefits of a reverse mortgage are:
  • A borrower does not require an income to qualify for reverse mortgage. His credit history is also not verified before approving the loan. Here the amount of loan is dependant on his age, the value of the property, interest rates and closing costs of home loans in the neighborhood of the borrower.
  • As long as the borrower or any co-owner occupies the property, there is no need of any repayment.
  • A borrower needs to pay off his pending debts before he can avail a reverse mortgage. But there are lenders including the state or local government agencies who may allow him to repay the previous mortgage after he pays off the reverse mortgage when required.
  • The amount received as reverse mortgage loan is not considered as income and hence the Internal Revenue Service does not charge any taxes on it.

Are there disadvantages or dangers of reverse mortgages?

There are 3 reverse mortgage pitfalls to watch out for:

  1. Rising debt and falling equity: 
    A traditional mortgage requires you to make payments and build up equity thereby raising your home value. But reverse mortgages reduce your equity because you don't need to pay monthly as a result of which your debt starts going up. The equity gets even lower unless the home value appreciates at a higher rate. Thus, reverse mortgages are often known as "rising debt and falling equity". 

    Here's an example on "Rising debt and falling equity". 

MonthlyLoan Amount: $2,000
Yearly Loan Advance: $24,000
Yearly Interest Rate: 8%
Original Home Value: $250,000
Appreciation Rate of Home Value: 5% per annum

End of Year

Principal Amount ($)

Total Interest ($)

Loan Amount ($)

Total Home Value ($)

Home Equity ($)
(Total Home Value - Loan Amount)

1

24,000

1,052

25,052

262,500

237,448

2

48,000

4,102

52,102

275,625

223,523

3

72,000

9,224

81,224

289,406

208,182

4

96,000

16,495

112,495

303,876

191,381

5

120,000

25,990

145,990

319,070

173,080

  1. The above calculation shows, even if your home value goes up, it may not be enough to raise your home equity. The rate of appreciation in home value should be high enough such that even if your loan balance increases, your home equity won't go down easily. 

    Now, when the appreciation isn't high, the equity will reduce as a result of which you may not have enough of estate to leave for your heirs. However, your heirs will only receive your home when the value of the home is more than what you owe.
  1. Rates and closing costs: 
    The rates being adjustable can be higher at times thereby raising your interest and hence your debt because you aren't paying monthly. The closing costs are quite high although under the new housing laws, the costs have been cut down and capped so that older homeowners can afford to go for the reverse loan.

 

  1. Eligibility for Medicaid benefits: The loan proceeds may affect your eligibility to receive Medicaid benefits and Supplemental Social Security income (SSI). However, you can still qualify for Medicare and Social Security Income. Know more.

In spite of the reverse mortgage cons, these loans are preferable options when it comes to paying for your healthcare costs, remodeling your home or making a big purchase and changing your lifestyle. Moreover, if you have debts to pay off, need money for someone's education or wish to plan for a vacation, reverse mortgages are worth considering.

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