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Reverse Mortgages—As the Market Tanks, More Seniors Are Considering This Option

This Blog Is Sponsored By Soundview Financial’s Reverse Mortgage Guide. For more information on Reverse Mortgages, please visit the Reverse Mortgage Guide by clicking here.

As the value of retirment accounts have been dramatically reduced, seniors are looking at alternative strategies to fund ongoing living expenses in retirement.  A reverse mortgage allows you to tap the equity in your home without having to sell or take out another type of loan.  The proceeds of a  reverse mortgage allow you to pay your bills and stay in your home.

Here’s a basic overview on reverse mortgages.  Remember, to consult with your financial advisor before taking out a reverse mortgage since this type of mortgage may not be right for you and always remember to read the fine print.

Until recently, there were two main ways to get cash from your home:
• you could sell your home, but then you would have to move; or
• you could borrow against your home, but then you would have to make monthly loan repayments.

Now reverse mortgages give you a third way of getting money from your home. And you don’t have to leave your home or make regular loan repayments.

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home, or permanently move out of your home.

Who’s Eligible

All owners of the home must apply for the reverse mortgage and sign the loan papers. All borrowers must be at least 62 years of age for most reverse mortgages. Owners generally must occupy the home as a principal residence (where they live the majority of the year).

Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, cooperatives, planned unit developments, and manufactured homes. Mobile homes are generally not eligible.

How They Work

Reverse mortgage loans typically require no repayment for as long as you live in your home. But they must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away.

Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. But you generally cannot owe more than your home’s value at the time the loan is repaid.

Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

What You Get

These loans can be paid to you all at once in a single lump sum of cash, as a regular monthly loan advance or as a creditline that lets you decide how much cash to use and when to use it. Or you may choose any combination of these payment plans.

Some reverse mortgages are offered by state and local governments. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered by banks, mortgage companies, and savings associations. These “private sector” loans can be used for any purpose.

The amount of cash you can get from a private sector reverse mortgage generally depends on your age, your home’s value and location, and the cost of the loan. The greatest cash amounts typically go to the oldest borrowers living in the most expensive homes on loans with the lowest costs.

The amount of cash you can get also depends on the specific reverse mortgage plan or program you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgages.

What You Pay

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well. Private sector reverse mortgages are very expensive, and include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is generally less expensive than other private sector reverse mortgages.

Consumers considering a private sector reverse mortgage other than a HECM should carefully consider how much more it may cost before applying. Other articles in The Basics section of this web site’s Reverse Mortgages information provide more details on measuring and comparing the total cost of these loans.

Taxes, Estates, and Public Benefits

Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner.

An American Bar Association guide states that generally “the IRS does not consider loan advances to be income.” The guide explains that if you receive SSI, Medicaid, or other public benefits loan advances are counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.

Visit Soundview Financial’s Reverse Mortgage Guide for helpful links and tips on reverse mortgages by clicking here.

Frequently Asked Questions on Reverse Mortgages

In an earlier post, we provided you with a brief overview of reverse mortgages. For this post, we wanted to answer some common questions on reverse mortgages. Of course, for more detailed information, articles and tips, please visit the Reverse Mortgages section at Soundview Financial’s Retirement Savings Guide. Here goes..

What is a Reverse Mortgage?
A reverse mortgage is a special type of loan, which enables you to tap into the equity in your home and receive cash, a tax-free monthly income and/or a line of credit. There are no income or credit qualifications and there are no monthly payments to make. The loan is not repaid until you permanently leave your home.

How Do I Qualify For A Reverse Mortgage?
A reverse mortgage is easy to obtain, provided that:

1. You are at least 62 years of age or older.
2. Your home is or is to be occupied as your primary residence.
3. You have substantial equity in your home (proceeds of the reverse mortgage can be used to pay off existing liens or mortgages).

What Can I Do With the Money?
You can use the money you receive from your reverse mortgage in any way you choose:

• Supplement your income
• Home improvements
• Purchase of a new home
• Pay off a current mortgage
• Medical expenses
• Pay off debt
• Buy a new car
• Travel
• College tuition or gifts to family

In short, the money is your to do what you want…..

How Much Money Can I Receive?
The amount of money you can receive from a reverse mortgage is determined by your home value, the number and age of the homeowner(s) and the current interest rate. Your lender will assist you in evaluating your options and calculate the maximum amount of money that will be available to you.

How Do I Receive the Money?
With a reverse mortgage, you have five payment plan options to choose from:

1. Tenure option: Receive equal monthly payments for as long as you occupy your home as your principal residence.
2. Line of Credit: Draw cash from your reverse mortgage whenever and in whatever amount you choose, up to the available limit. Interest is only charged on the funds drawn from the line of credit.
3. Lump Sum Cash Advance: You can receive all of your money in a lump sum upon the closing of your reverse mortgage.
4. Modified Tenure: Set aside a portion of the loan proceeds as a line of credit, in addition to monthly payments.
5. Term: Receive equal monthly payments for a fixed period of time that you select, for example 5 or 10 years.

How is Interest Charged on a Reverse Mortgage?
The interest on a reverse mortgage is adjustable and is tied to readily available market indexes. The initial rate is determined at loan closing and adjusts either monthly or annually. Interest charges do not affect your monthly payments and you are only charged interest on your loan balance, which consists of the cash you have received and the financed closing costs.

What Costs are Involved with a Reverse Mortgage?
As with a regular mortgage loan, there are closing costs involved with a reverse mortgage as well. These fees can be financed into the loan, and typically include the cost of the appraisal, title insurance, loan origination, escrow and recording fees.

When Does the Reverse Mortgage Need to be Repaid?
The reverse mortgage becomes due and payable when the borrower permanently leaves the home – whether they move, sell or pass away. Reverse mortgages are typically repaid from the proceeds of the sale of the home, with any remaining equity staying with the homeowner or their heirs. If a spouse passes away, the surviving spouse continues to receive the full benefits of the reverse mortgage, with no repayment until they decide to permanently leave the home.

Do I Still Own My Home?
Absolutely. You retain full ownership of your home when you obtain a reverse mortgage. As with any mortgage, the lender has a loan against your property. Since you make no monthly payments, the loan balance increases across time. When the loan is repaid the borrower or their heirs pay off the loan balance, which consists of the financed closing costs, the cash advanced from the reverse mortgage and the interest that has accrued. The remaining equity stays with the homeowner or their heirs.

For additional articles, insights, tips and resources for reverse mortgages, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Reverse Mortgages- What Are They?

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

An interesting vehicle for seniors to tap into the equity in their homes is a reverse mortgage. We provide an in depth overview of reverse mortgages at Soundview Financial’s Retirement Savings Guide, but here is a short overview.

Reverse mortgages are growing in popularity as a financial planning tool by enabling seniors to essentially “capture” some of the value in their homes by borrowing against the value of their home and using the funds for any purpose.

A reverse mortgage is a type of home equity loan that enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell their home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is seen as an important retirement consideration for many people.

The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. These payments can be a supplement to Social Security for people after the age of retirement.

With a reverse Mortgage you may continue to receive income, and defer repayment, for as long as you live at home – no matter how long that may be.

All reverse mortgages are non-recourse loans, which means there is no personal liability to you or your heirs – no matter what. Reverse Mortgage lenders can only look to your home’s value for repayment.

With a reverse mortgage, you can never be forced from your home and the reverse mortgage does not have to be repaid until after you permanently vacate your home, at which time the loan is paid off by the sale of the property. Any leftover equity belongs to the homeowner or the heirs. Reverse mortgages are seen by many to be the best way to maximize your lifetime investment in your home.

However, reverse mortgages also tend to be more costly than other loans, and there have been cases of abuse by unscrupulous lenders. If you are considering a reverse mortgage, it is important to understand how the loans work and what your rights and responsibilities are.

Proceeds from reverse mortgages can be used for any purpose such as supplementing retirement income, funding living expenses and covering health insurance or long-term care insurance costs.

You can get a free booklet on reverse mortgages from the National Reverse Mortgage Lenders Association by calling 866-264-4466.

For more information on reverse mortgages and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide.