Everything You Ever Wanted to Know About Reverse Mortgages

Brought to you by Jim McKinney

In the past, seniors 62 years of age and older have not had the best options when it came to getting cash or accessing the equity trapped in their homes. Traditional mortgage loans only offered the options of either selling one's house or borrowing against its equity by taking out a loan with a higher loan balance. Obviously, this meant moving into a new home or possibly taking on higher monthly repayments; not exactly the most appealing choices for those who have no interest in uprooting.

Take for example a couple in their late 70's who have called their castle home for more than 30 years. After over 20 years of home improvements they are looking forward to spending the rest of their lives in that house and uprooting is the last thing they want to do.

Need a Loan? Call Toll Free 1-866-388-1036 Mortgage Loan Application

Now, with all of their financial investments behind them, this couple decided they would like to spend some time traveling the world. They are also interested in finding a way to generate extra monthly income in order to supplement their retirement and Social Security income and cover the cost of prescription medications.

Tax-Free Income

With a reverse mortgage our couple now have some appealing cash-flow alternatives that they didn't have before. These loans will allow the couple to convert their home equity into tax-free income* without having to sell their current home or take on new monthly mortgage payments. They can also receive credit lines and/or cash payments without incurring any monthly payments and there are no minimum income requirements; nice options traditional home loans do not offer.

For maturing Baby Boomers and seniors, the idea of staying in their home while collecting monthly advances can be very attractive. Many of them have no desire to relocate. Instead, they would prefer cash advances to improve and repair their home, pay off debt or even travel the world.
In addition, not having to pay the debt until the future and having no monthly payments, and a reverse mortgage becomes an ideal option for those in their golden years.

*We strongly recommend consulting your tax advisor when choosing a reverse mortgage plan.

A Senior Moment

To apply for a reverse mortgage one must be 62 years of age or older. All owners who are on the title must meet this age requirement, as well as apply for and sign the loan documents. Furthermore, the home must remain as the principle place of residence.
Another attractive benefit of a reverse mortgage is there are no medical or income requirements to meet in order to qualify. Since you are not paying monthly payments, income plays no role in your eligibility for a reverse mortgage.

Single family residences are eligible for reverse mortgages, and some programs do accept other property types, such as condominiums and manufactured houses. Generally the only exceptions are co-ops and mobile homes, which usually do not qualify for reverse mortgages.

Pre-Mortgage Counseling

To ensure homeowners are fully educated and aware of the financial ramifications of a reverse mortgage, one must undergo counseling with an unbiased third party before completing a loan. AARP and HUD oversee a network of counselors who provide this service, and it should be offered for no charge or a nominal fee.

Reverse mortgages are best understood when compared side-by-side with a traditional home loan, also known as a "forward" mortgage. The following table shows the differences between the two types of mortgages:

As you can see, both loans incur debt against your home and both affect equity, but they do so in very different ways. For a traditional home loan, you would make monthly payments to a lender. With a reverse mortgage, they will make the payments to you. In essence, the two loans work the complete opposite of one another.

A Plan of a Lifetime

There are basically three different reverse mortgage plans being offered today: Uninsured, Lender-Insured, and FHA-Insured.

Uninsured. This type of reverse mortgage differs dramatically from an FHA-Insured or Lender-Insured loan. With this plan, you receive monthly loan payments for a fixed term only - the number of years you select when you initially take out the loan. The second important difference to note with an uninsured loan is that it will be due on a specific date. This type of reverse mortgage is usually best suited for short-term, substantial cash needs.

Lender-Insured. This type of reverse mortgage offers monthly loan advances with or without a line of credit, for as long as you live in the home. This type of plan typically offers larger loan amounts than an uninsured or FHA-Insured plan would. You may also be allowed to mortgage less than the full value of your home, thus preserving your equity for later use.

Home Equity Conversion Mortgage (HECM) - The Federally Insured Loan.
The third and most common type of reverse mortgage is the Home Equity Conversion Mortgage, also known as HECM. This is the only reverse mortgage program that is federally insured and backed by the U. S. Department of Housing and Urban Development (HUD).

Home Equity Conversion Mortgages have several very attractive features that make them the most popular choice among borrowers:

• Choose your own interest rate. The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage that lets you choose your own interest rate. You can select one that changes annually or monthly.
• Several payment options. You may receive monthly loan advances for a fixed term or for as long as you live in the home. You can also choose to receive a line of credit, or you may combine monthly loan advances with a line of credit. An HECM also allows you to change your payment options at little cost.
• Can be used for any purpose. Unlike many other reverse mortgages, a HECM does not require a borrower to designate the loan for one specific use. Instead, you may apply the funds to anything you choose.
• Protection. Most important, this loan protects you by guaranteeing continued loan advances even if your lender defaults.

What Does a Reverse Mortgage Cost?

In addition to not having any monthly payments or having to qualify for the loan, except for the age and existing equity requirements, reverse mortgage interest rates are typically lower than those for traditional home equity loans. This is yet another valuable benefit for those considering a reverse mortgage.

The loan fees and costs incurred for obtaining a reverse mortgage can typically be offset by the money you receive from the loan. These costs will be added to the balance of the loan and must be repaid with interest once the loan terminates.

Total Annual Loan Cost (TALC)

In order for borrowers to gain a better understanding of the true cost of reverse mortgages, the federal Truth-in-Lending (TIL) law requires lenders to disclose what they call a "Total Annual Loan Cost" for the loan, otherwise known as TALC. TALC displays the total transaction cost over the life of the loan. This makes seniors fully aware of the cost of incurring the loan. The TALC is also extremely insightful when comparing various types of reverse mortgages.

Once we determine that a reverse mortgage is right for you, we will then decide which type would best suit your financial needs. This is step two in our action plan of providing you with the right mortgage. Call me now to get started!