Reverse mortgage loans | Reverse mortgages
Tuesday, July 1st, 2008The slow housing market is affecting a lot of people, including older homeowners who are having no trouble meeting their mortgage payments, don’t plan to sell and may not even have a mortgage payment! Those affected are homeowners who could have gotten reverse mortgages before the market slowdown, but are now looking at lower home values and, as a consequence, less potential payoff from getting a reverse mortgage.
A reverse mortgage enables older homeowners to convert equity in their homes into tax-free income without having to sell the home, give up title, or take on a new mortgage payment. The reverse mortgage is so named because the stream of payments is reversed. Instead of making monthly payments to the lender, as with a regular “forward” mortgage, a lender pays you. The amount of funds you are eligible to receive depends on the age of the youngest spouse, appraised home value, current interest rates and loan limits in your area. The older you are and the more equity you have in your home, the more money you can get.
Reverse mortgages are being taken out by increasing numbers of homeowners every year (over 100,000 FHA mortgages last year, up 41% from 2006), but they are still a small segment of the overall mortgage market. The multitude of commercials for reverse mortgages with well-known celebrities might lead you to believe it is greater. That’s because the lending industry sees this as having big potential as baby boomers age. Reverse mortgages make sense for many homeowners, however, they aren’t for everybody. If you are thinking about looking into a reverse mortgage, be sure to include a financial advisor and your family in the discussions.
Who is the best candidate for a reverse mortgage?
Someone who is over 62 (all owners on the title must be over 62), has a lot of equity in the home and has a clear plan for the money are prime candidates.
What are the options for getting the money?
You can receive your money in one of four ways: (1) as a fixed monthly payment either for a set term or for as long as you live in the home; (2) as a lump sum; (3) as a line of credit that has a growth factor which takes into account appreciation in your home and your aging; or (4) a combination of the three.
As an example of the last option, you could get a lump sum to pay off what remains of your current mortgage, set up a monthly draw to pay for long term care insurance and keep an ever-growing equity line to cover unexpected expenses or to access some quick cash.
How can the funds be used?
This is one of the great attractions of the program. There are no limits on how you use the money, except your own imagination. Consider the following choices: Eliminate mortgage payments; supplement retirement income to cover daily expenses; repair or modify your home for health needs; pay for health care; pay off all bills; take a dream vacation; underwrite grandchildren’s college expenses; reinvest the proceeds in a higher yield account; pay your property taxes; avoid foreclosure.
Does a reverse mortgage affect my current government assistance, retirement benefits or estate plan? A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately, since funds you retain would count as an asset. Will there be anything left for your estate? You still own the home and the reverse mortgage will probably never exceed 60% of its value. If you take a lump sum, the remaining equity is still yours. If you are taking a draw, your home will probably appreciate again once we clear the current slowdown. The important thing to remember is that you can never owe more than the value of the home. Even if your proceeds were to exceed the value of the home, your heirs will not be responsible nor will other assets be attached.
How is the loan paid back?
No payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy it as a principal residence, that is, when you or the last remaining spouse passes away, sells the home or permanently moves out (12 months of non-occupancy). When the home is sold, proceeds that exceed the amount owed goes to you or your estate.
What are the negatives?
Upfront costs for a reverse mortgage are substantial. If you plan to stay in the home for less than four years, there may be better options available, such as a traditional home-equity loan or mortgage where you take out enough cash to cover the monthly payments.
You will be consuming the equity in your home.
If your goal was to leave the home debt-free to your children, this may not be a good idea. Sit down and discuss the situation with your heirs.
You are not going to get a lottery-size windfall with this mortgage.
The best current option is the FHA version of the loan and you will be constrained by their limits. Fannie Mae’s version is more expensive and gives you less. The private market is just starting to address homes with large equities. As demand continues to rise for these products, though, the marketplace will become more competitive and creative. Though this mortgage is an excellent way to deal with foreclosure, tax sales and potential bankruptcy, it may very well only be a short-term solution. If there are other financial issues, seek advice for more options. If you are considering a reverse mortgage, do your homework and analyze the costs and benefits. AARP offers reverse mortgage counseling and one-on-one help. © 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®
John Hodges of Choice Finance®
