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Reverse Mortgage

Besides two main ways of getting cash from your home, that is selling your home or borrowing against your home, there is a third one which does not require you to move out or make monthly loan repayments. This third way is a Reverse Mortgage.

A reverse mortgage (also called lifetime mortgage) is a special home loan type available for senior homeowners. Reverse mortgage allows borrowers to convert a portion of the equity in their home into a tax-free cash flow. Unlike it is with traditional mortgages, reverse mortgage loans require the lender to pay the borrower and the borrower does not have to pay back for as long as he/she lives in the house.

As the homeowner makes no payments, all interest is added to the lien on the property, and as the owner receives a bulk payment of the equity percentage or monthly payments, the debt on the property increases each month. Reverse mortgage loans are paid back through the sale of the house. In case the house is sold for less money than the loan amount due, it will be paid off by the mortgage insurance. If the house is sold for greater amount than the loan amount due, in this case the existing homeowner or their heirs will have the difference at their disposal.

In order to qualify for most reverse mortgages, a person must be at least 62 and live in his/her home as a principal residence. There are no minimum income or credit requirements. Some types of houses do not qualify; others may have special requirements in order to be approved. For example, single family one-unit dwellings are eligible properties, while mobile homes and cooperatives are often not eligible.

Reverse mortgages enable eligible homeowners to access the money they have built up as equity in their homes over years of home mortgage payments and thus give a good chance to enhance their retirement. The total loan must be repaid only when the last surviving borrower dies, the home is sold, or the owner leaves the house permanently.

The money that the homeowners receive from lenders is not taxable and they can use it at their discretion. Also, it is up to homeowners to choose a payment plan which suits them best. A reverse mortgage can be paid to you all at once in a lump sum, or as a regular monthly advance, or at times and in amounts that you agree. The options basically fall into five groups, each having its advantages: tenure, term, periodic line of credit, modified tenure and modified term. The borrower can also move the entire amount he/she received into investments.

Tenure means receiving equal monthly payments until the borrower dies or permanently moves out. Selecting a term type, you select equal monthly payments for a fixed period of months.

Line of Credit is payment in installments at times and in amounts the borrower chooses.

Modified Tenure combines the line of credit with monthly payments for the whole period the borrower remains in the home as their permanent residence. And Modified Term is a combination of line of credit and monthly payments for a fixed period of months the borrower chooses at his/her convenience.

Basically there are several factors determining the amount of money available to the reverse mortgage consumer: the age of the consumer, the appraised value of the property, the current interest rate, the way in which the payment is taken, and your location. The amount of cash you can get depends on the particular reverse mortgage plan of your choice, and loan amounts may vary greatly depending on the plan. The greatest cash amounts would go to the oldest borrowers who live in the most expensive homes on loans with the lowest costs.

Like with all serious financial questions, it is vitally important to consider all pros and cons of Reverse Mortgage before you take any decision. You might feel apprehensive about Reverse Mortgages since they are quite different from other types of debt.

To begin with the pros, the homeowner's house will never be taken away while he/she is still living there. The home can be sold either upon death, or because the homeowner is unable to live in the home for more than 12 months. Or else the homeowner may willingly decide to sell their home.

You retain the title to your home, collect revenue, still can get Social Security or Medicare benefits and spend the funds received as you wish. Reverse Mortgage helps solve such problems as financing a home improvement, paying off a current mortgage, adding funds to retirement income, paying for healthcare expenses etc. In other words, if you are a senior citizen and own a house, you can use it to meet your financial obligations and you can enjoy life a lot more, spending time with your loved ones and not worrying about your bills.

Reverse mortgages also have their pitfalls. As you continue to own your home, you remain responsible for property taxes, utilities, insurance, fuel, repairs and other maintenance expenses. If you don't keep taxes and insurance current at all times, there is a risk of the loan becoming due and payable in full, which means a default on the reverse mortgage.

Reverse mortgages reduce your equity as your total debt grows over time. "Rising debt and falling equity" is yet another name reverse mortgages are known by. Interest is charged on the outstanding balance and then added to the amount you owe each month. Your debt grows larger, and consequently the cash amount you would have left after selling and paying off the loan grows smaller. Even if your home value goes up, it is often not enough to raise your home equity. If the rate of appreciation isn't high, the equity will reduce, which means that you will have fewer assets to leave for your heirs. Your heirs will receive your home only when the value of the home is more than what you owe.

In most reverse mortgages there is a "nonrecourse" clause, which prevents you and your estate from owing more than the value of your home at the time when the loan is repaid.

Reverse mortgage rates and closing costs can be rather high. Since you are not paying monthly, the adjustable rates can be higher at times, which will raise your interest and your debt.

One more pitfall might concern those who considered receiving Medicaid benefits or Supplemental Social Security income. The reverse mortgage loan proceeds may affect your eligibility for Medicaid benefits and SSI.

There are three basic types of reverse mortgage:

— Single-purpose reverse mortgages

They are mortgages with low costs offered by state and local government agencies and nonprofit organizations. Only people with low or moderate income can be eligible for these public sector loans. As the mortgage's name implies, one can use it for one purpose only, for instance, in order to pay for home improvements, or property taxes.

— Federally-insured reverse mortgages (known as Home Equity Conversion Mortgages)

HECMs are backed by the U. S. Department of Housing and Urban Development (HUD) and are generally more expensive than other mortgage types. They can be used for any purpose and there are no specific requirements you should meet to qualify.

— Proprietary reverse mortgages

Those are private sector loans that are backed by the companies that develop them. They can be used for any purpose. The amount of cash you can get from a proprietary reverse mortgage will depend on your age, the value and location of your home, and the cost of the loan.

Before taking out a reverse mortgage, applicants should seek third party financial counseling from a source approved by HUD (the Department of Housing and Urban Development). It is important to know the exact value of your home in the conditions of the local real estate market.

If you need to raise capital and still would like to avoid applying for a reverse mortgage, there are certain alternatives to it. The best thing you can do is to keep fit and healthy as long as possible in order to enjoy life to the fullest and reduce or minimize your health expenses. You should think about your retirement while still working and perhaps work longer and try to save more at that time. Budgeting is a smart way to reduce your expenses and save too. Selling your house and moving somewhere more affordable can be an option for those living in large houses or in houses in expensive areas. Consider taking on a boarder, a friend or relative who can share your expenses. Seek support from your family, friends or charities.

No matter what decision about a reverse mortgage you make, you should know exactly what the plan or program of your choice is about. If you have signed the loan documents and then suddenly changed your mind, remember that you have at least three business days after signing the documents to cancel it in writing. The lender will return any money you paid without penalty.