Reverse Mortgages – What should you know before applying?

The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping their home equity has become an attractive but potentially risky option. A reverse mortgage can turn your home equity into tax-free cash without forcing you to move or make a monthly payment. This can be a worthwhile financial tool if used in the right situations. If not, you can end up with serious complications to your financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms, including:
- A lump sum cash payment;
- A monthly cash payment;
- A line of credit;
- Some combination of the above.

To qualify for a reverse mortgage a borrower generally needs to own a home, reside in it as their principal residence, be at least 62 years of age, and have significant equity in the home. When the owner dies or moves away, the house can be sold, the loan paid off and any remaining equity value can go to the living owner or the borrower’s designated heirs. Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within a certain amount of time after the owner dies or moves away.

There are three basic types of reverse mortgages:
- Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;
- Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
- Proprietary reverse mortgages are private loans that are backed by the companies that develop them.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. In general, older borrowers can borrow more but the amounts are capped by the maximum Federal Housing Administration (FHA) loan limit for each city and county.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services or home improvements. Reverse mortgages have also been used to pay off a current mortgage or credit card debts. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines.

Here are some of the other things to consider:

- Reverse mortgages can be complex and risky: Borrowers should consider discussing the appropriateness of a reverse mortgage given their current financial situation and the other options available to them before applying for a reverse mortgage. Borrowers of HECMs are required to consult with a counselor from a HUD approved agency before they are granted this loan.

- Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages and home equity lines of credit in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance but they can run between $12,000 - $20,000 dollars. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

- Borrowers need to make sure they are not jeopardizing their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if a borrower’s total liquid assets exceed allowable federal limits, the borrower’s federal retirement benefits may be negatively impacted.

- Interest Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month.

- The mortgage can be called: The homeowner or estate always retains title to the home, however, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts if the borrower fails to pay the property taxes on the home, fails to adequately maintain the home, fails to pay the home insurance premiums, or changes their primary residence.

- Estate Planning Implications: Repayment of a reverse mortgage will impact the borrower’s estate and potentially reduce the asset being passed on to the borrower’s heirs. It is important to factor in the potential effects of a reverse mortgage on the borrower’s estate plan to ensure that the borrower’s estate planning goals are met.

Source

What should you know before your think about a reverse mortgages

The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping home equity has been a safety net. But it can be a risky one.

If your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment.

If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

• A lump sum cash payment;

• A monthly cash payment;

• A line of credit (which tends to be the most popular option);

• Some combination of the above.

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.

There are three basic types of reverse mortgages:

• Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

• Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

• Proprietary reverse mortgages are private loans that are backed by the companies that develop them.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services, home improvements or to pay off their current mortgage or credit card greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes and evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

Elderly borrowers will have to consult with a HUD Counselor or financial advisor before they’re granted this loan – that’s one of the requirements. They should consider a Certified Financial Planner ™ professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.

Here are other things to consider:

Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000-$18,000. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

They’ll need to make sure they’re not endangering their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if their total liquid assets exceed allowable limits under federal guidelines, they might endanger your benefits. This is another critical reason to work with a financial adviser on this decision.

Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month. Again, check the total annual loan cost.

Their mortgage can be called: The homeowner or estate always retains title to the home, but if they fail to pay your property taxes, adequately maintain their home, pay their insurance premiums, or change their primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

The family needs to talk. If your parents’ house is their major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, parents and their adult children need to talk with their family.

Source

Seniors should know all about reverse mortgages

As reverse mortgages become more popular, seniors need to understand how these loans work. Counselors for Consumer Credit Counseling Service (CCCS) of East Tennessee, a member of the CredAbility Network, which is one of the nation's largest nonprofit reverse mortgage counseling agencies, say homeowners often have misconceptions about major features of these loans.

CCCS is one of the leading nonprofit counseling agencies in the United States with housing counselors who are certified in reverse mortgage counseling. The agency helps homeowners by providing objective information about reverse mortgages, including the advantages and disadvantages, so a homeowner can decide if this loan is right for them.

"Reverse mortgages can provide needed additional funds for senior citizens on fixed incomes," said Daru Burdge, president of Consumer Credit Counseling Service of East Tennessee (CCCS). "But they aren't for everyone. Understanding the benefits, the risks and the costs involved is an important first step when considering a reverse mortgage."

Below are some important facts about reverse mortgage loans:

A reverse mortgage is a rising debt, falling equity mortgage.

Homeowners often believe there will still be plenty of equity remaining when they pass away, and that they will be able to leave money to their heirs. While that may be true, it's also possible there will be no equity remaining as the rising debt wipes out the remaining equity. This most often occurs when the homeowner lives to their normal life expectancy or beyond. In addition, homes may not appreciate and interest rates on an adjustable rate loan can rise and be higher than expected. These factors can cause the balance on the loan to equal, or even exceed, the equity in the home.

A reverse mortgage loan may include higher closing costs than a forward mortgage.

While closing costs are financed as part of the loan, these costs reduce the home's equity and leave fewer funds for the homeowner. For all Home Equity Conversion Mortgages (HECM), borrowers are charged a mortgage insurance premium. Approximately one-third to one-half of the amount of the closing costs is to pay for FHA mortgage insurance.

Counselors explain to the homeowner that if they plan on selling their home within a short period, a reverse mortgage may not be a good use of their equity. Our counselors provide a HUD-approved Total Annual Loan Cost analysis (TALC), which expresses the average annual cost of a reverse mortgage at four future dates. The average cost becomes lower the longer the loan is in effect.

A surviving spouse younger than 62 years old automatically keeps the house once their spouse passes away.

A person must be 62 years old or older to qualify for a reverse mortgage. Some couples include one person who is younger than 62 at the time of the reverse mortgage application. In this case, the younger person must be removed from the deed for the older person to receive the reverse mortgage.

The surviving person younger than 62 years old, however, may be allowed to keep the house when their spouse or partner passes away. Once the older person passes away, the reverse mortgage must be paid back. The surviving person has the option to sell the house, refinance the balance with a forward mortgage or, if age 62 or older at the time of the death, refinance the old reverse mortgage with a new reverse mortgage and take advantage of any increase in the home's equity.

Source