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Reverse Mortgage

Reverse Mortgages are becoming popular in America. The U.S. Department of Housing and Urban Development (HUD) created one of the first. HUD's Reverse Mortgage is a federally-insured private loan, and it's a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements, and more. You can receive free information about reverse mortgages by calling AARP at: 1-800-569-4287, toll-free. Since your home is probably your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you!  There are considerations about using your equity for your quality of life as opposed to trying to pass on as much as possible to your children and grandchildren.  Mostly it is a matter of understanding and pricing this and equity financing as a lump sum or as a line of credit.

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. HUD's reverse mortgage provides these benefits, and it is federally-insured as well.

2. Can I qualify for a HUD reverse mortgage?

To be eligible for a HUD reverse mortgage, HUD's Federal Housing Administration (FHA) requires that the borrower is a homeowner, 62 years of age or older; own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan; and must live in the home. You are further required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency and a list of FHA approved lenders within your area.

3. Can I apply if I didn't buy my present house with FHA mortgage insurance?

Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new HUD reverse mortgage will be a new FHA-insured mortgage loan.

4. What types of homes are eligible?

Your home must be a single family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA-approved. It is possible for individual condominiums units to qualify under the Spot Loan program.

5. What's the difference between a reverse mortgage and a bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

6. Can the lender take my home away if I outlive the loan?

No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.

7. Will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. This debt will never be passed along to the estate or heirs.

8. How much money can I get from my home?

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

9. Should I use an estate planning service to find a reverse mortgage?

I've been contacted by a firm that will give me the name of a lender for a "small percentage" of the loan? HUD does NOT recommend using an estate planning service, or any service that charges a fee just for referring a borrower to a lender! HUD provides this information without cost, and HUD-approved housing counseling agencies are available for free, or at minimal cost, to provide information, counseling, and free referral to a list of HUD-approved lenders. Call 1-800-569-4287, toll-free, for the name and location of a HUD-approved housing counseling agency near you.

10. How do I receive my payments?

You have five options:

Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

Term - equal monthly payments for a fixed period of months selected.

Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.

Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.

Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.  

Most seniors use a Reverse Mortgage to help close a gap between their retirement expenses and their retirement income. However, Reverse Mortgages offer particular financial advantages when used by seniors as an estate planning tool in a retirement plan.

Consider the following uses of a Reverse Mortgage:

Funding for Healthcare or Medical Treatment

Long term care is a big risk to most seniors' financial planning for retirement.

While 42 percent of people over the age of 65 require or will require long term health care, neither Medicare nor Medicare supplemental insurance cover the costs of these services - either in your own home or in a nursing facility. Moreover, most seniors don't have long term care insurance.

Many financial retirement planners recommend that their clients secure a Reverse Mortgage to help fund a long term care insurance cost or other medical costs.

Using a Reverse Mortgage to pay for medical costs and/or insurance can be an important part of asset protection planning for the benefit of you and your heirs.

Other Asset Protection Strategies – Leave Something to Your Heirs

You might consider using the proceeds from a Reverse Mortgage to fund a life insurance product. This is particularly useful if you have built up significant home equity.

Funding a life insurance policy with a Reverse Mortgage gives you control over your estate and assures the legacy you leave retains its value by:

  • Lowering the total estate value subject to taxes: The full value of your home is subject to estate tax, but a Reverse Mortgage against the property reduces its value - lowering applicable estate taxes. Your heirs will not owe as much estate tax upon the sale of your home. Furthermore, when the life insurance policy pays the benefit to heirs, they receive the benefit in tax-free dollars.
  • Leaving your heirs a guaranteed sum: By purchasing a life insurance policy for your heirs with funds from a Reverse Mortgage, you know exactly what you are leaving behind.

When your property is sold, any equity over the loan amount would be subject to taxes, but the remainder would still revert to your heirs. However, the unknown nature of future real estate markets makes this a potentially risky scenario. Purchasing a life insurance policy with Reverse Mortgage funds provides for greater control of your estate and legacy.

Furthermore, if you use the money from a Reverse Mortgage to buy additional life insurance for your heirs that insurance purchase would have been made with tax-free dollars. The larger premium paid for life insurance coverage would translate into a larger death benefit.

Starting January 1, 2009, FHA will begin to insure reverse mortgage loans for purchases.  What does this mean? Senior borrowers age 62 and over can now purchase a home using a reverse mortgage rather than a traditional forward mortgage.  This is great news to seniors who have had a desire to purchase a new home but felt they could not either due to their credit, their income, they did not want to have to start making payments again at this stage in their lives or a myriad of other reasons.

What does this really mean for senior borrowers? We have heard many senior borrowers who loved their homes and never wanted to leave it.  We have heard from almost as many who told us that they found their existing home just did not suit their needs any longer but they could not see any way of moving to a new home so they felt that they either had to remain in the home with which they no longer felt comfortable or their only other option was to sell it and rent an apartment somewhere and that option just was not very appealing to them.

The purchase reverse mortgage program allows borrowers to purchase a new home, they do not have to pay for the entire home with cash and they never have to make a mortgage payment for as long as they live in the property. There is no income or credit qualification (other than HUDs requirement that the borrower's must be able to maintain their home and pay the taxes and insurance and cannot be delinquent on federal obligations or currently in bankruptcy) and the Home Equity Conversion Mortgage (HECM or "HECK-um") for purchase can be used with all the same property types that the refinance HECM programs currently accommodate.

One thing that HUD did for seniors that will really help them in this market is that they are determining the down payment requirements solely on the appraised value, rather than the normal FHA method of the appraised value or the sales price, whichever is less.  This may not sound like much of a concession at first, but stop and think about a property which must be sold quickly in this market which still appraises for a higher value.



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