What is a reverse mortgage?
A reverse mortgage is a special arrangement seniors make with a lender (bank, credit union, HUD) for a loan against the equity in their homes. You must be 62 to apply – if only one partner is 62 or older, the loan will be under that person’s name. The funds you receive can be used any way you want. These funds will not affect Social Security benefits, SSI, Medicaid, Medicare, or any pension you might receive. If you have special circumstances, a visit with your financial advisor is indicated.
The National Reverse Mortgage Loan Association (NRMLA) reports that in 2002, more than 13,000 homeowners used the reverse mortgage, a 68% increase over 2001 figures.
Reverse mortgages are most often used by seniors who have paid off their mortgages, or have only a small amount to be paid off (can be done at closing for the new loan). Unlike other home equity loans, a reverse mortgage is generally not paid back until the house is sold upon the owner’s death or departure. Anything left over goes to the homeowner or their heirs. If the house sells for less than the amount borrowed, HUD, for example, will pay the lender the difference. An insurance premium is collected to provide for this coverage.
Homeowners can choose to receive the funds all at once, accept monthly payments, or establish a line of credit. If their circumstances change, they can make a new choice.
Who offers reverse mortgages?
Banks, some Credit Unions, mortgage services, HUD. Online: LendingTree.com, LoanWeb.com, eLoan.com, and others.
I live in a manufactured home – can I get a reverse mortgage?
Your mobile or manufactured home may be eligible for a reverse mortgage if it is permanently attached to a foundation. Other types of homes that will not qualify include rental properties of more than four units, homes on rented or leased land, vacation homes, etc.
What about taxes?
I am advised that the Internal Revenue Service treats the funds received from a reverse mortgage as a loan advance instead of taxable income. However, that may have changed. You can call the IRS toll-free at 800-829-1040 to make sure this is still true.
What are my options?
There are three types of reverse mortgages:
1. Home Equity Conversion Mortgage: insured by the Federal Housing Administration (HUD) is the most popular type. Interest varies from month to month or annually, depending on the homeowner s payout preference. Interest is determined by the weekly regulated “One-Year U.S. Treasury Constant Maturity Rate.”
2. The Fannie Mae Home Keeper loan uses the “One-Month Certificate of Deposit Secondary Market Rate” to figure interest, plus 3.4%.
3. The Cash Account Loan was developed by the Financial Freedom Senior Funding Corporation. You can get more money here, but it is not available in every state.
What are the advantages?
First, you get most or some of the equity you have tied up in your home.
Also, you can decide how to receive the funds. You can get them all at once, or as a line of credit, monthly payments to you (as long as you live in the house) or a combination of a line of credit and monthly payments.
According to information gleaned from the Internet, these funds are tax free. I tried to confirm this by calling the IRS. The person I reached didn’t know, and transferred me to someone else. After holding for 15 minutes I gave up. The best course would be to ask a tax attorney.
A reverse mortgage is probably not for you if you:
oDon’t have enough equity in your home to make it worthwhile (see calculator below)
oHave a second mortgage (but ask your banker)
oAnticipate that your house will deteriorate markedly over time
oKnow nothing about them, or about mortgages in general.
Plenty of information is available on the Internet (see links) FREE. Never pay for information unless it’s your lawyer or other financial planner.
Use a mortgage calculator (sample below) to determine your costs and what you are likely to receive. In any case, lenders, financial counselors, tax attorneys and accountants can give you any information you lack. Here is a sample:
Monthly Adjusting HECMAnnual Adjusting HECMFannie Mae HomeKeeper
Current interest rate index3.68% 3.68% 3.40%
Lender’s margin1.50% 3.10% 3.40%
Current loan interest rate5.18% 6.78% 6.750%
HUD Mortgage Insurance0.50%0.50% – –
Current effective loan rate5.68% 7.28% 6.750%
Growth rate in credit line5.83% 7.53% 0%
Cap on effective loan rate15.68% 12.28% 18.75%
Value of your home$100,000 $100,000 $100,000
Lending limit$194,650 $194,650 $359,650
Lesser of limit or home value$100,000 $100,000 $100,000
Loan principal limit$63,700 $47,900 $23,826
Less loan fees to lender$2,000 $2,000 $2,000
Less Mortgage Insurance$2,000 $2,000 $0
Less other closing costs$1,662 $1,662 $1,488
Less service fee set-aside$5,067 $4,280 $3,589
Cash available to you$52,971 $37,958 $16,749
Less liens on your home$0 $0 $0
Less necessary repairs$5,000 $5,000 $5,000
Less other upfront cash$10,000 $10,000 $10,000
Less Desired Credit line$15,000 $15,000 $1,749
Left for monthly advance$22,971 $7,958 $0
Monthly advance: Tenure$136 $56 $0
Credit line in 5 years$19,913 $21,562 $1,749
Credit line in 10 years$26,436 $30,996
oDon’t sign up for a reverse mortgage until you feel absolutely comfortable with it. Take advice.
oUse a lender you’re familiar with. The National Reverse Mortgage Loan Association keeps lists of its members who subscribe to their Code of Conduct.
oThe costs are fairly high, but they are rolled into the loan – you don’t have to pay them upfront (except for regular closing costs, charges for title search and/or escrow). Check with your lender on this. A reverse mortgage may cost much more than getting a conventional loan. The charges should be carefully calculated against the amount you will receive to make sure the reverse mortgage is worthwhile.
How much money can I get?
Generally speaking, the older you are the more equity you have in your home; the more equity you possess, the more money will be available to you. Other factors are the prevailing interest rate and the home’s value. For example, at today’s interest rates, a 65-year old owner could get up to 26% of her home’s value; at 75 she could get about 30-39%, and at 85, up to 56%.
In qualifying homeowners for reverse mortgages, HUD places no limits on the value of the home. There is a cap, however, on the amount that can be borrowed. This is determined by local housing costs and the “maximum FHA mortgage limit” for your area, usually between $81,548 to $160,950.
HUD will also charge you 2% of the home’s value for the insurance that will pay the lender if, when the house is sold, it does not fetch the amount owed on the reverse mortgage. On the loan balance, Ã?Â½% is charged per year. A private lender who does not offer FHA insurance may charge you more.
How and when is the reverse mortgage paid back?
The reverse mortgage is paid back when the owner dies or leaves the home permanently. If money is owed, the owner or her heirs will pay that amount plus accumulated interest. These loans are “non-recourse loans,” meaning that the borrower can never owe more than the value of the home, whatever the loan balance may be. That means the lender never actually owns the house: the loan is either satisfied upon the sale of the house or if the home has lost value, the FHA insurance pays the difference.
What is required of me while I live in the house?
You are required to pay your local taxes, maintain the home in good condition, keep homeowners’ insurance in place, and let your lender know if you will be away from the house for an extended time.
For additional information, visit:
Ã¢Â?Â¢National Reverse Mortgage Lenders Association (NRMLA)
Ã¢Â?Â¢U.S. Department of Housing and Urban Development
Ã¢Â?Â¢Independent Information on Reverse Mortgages
Ã¢Â?Â¢Finance for Seniors