A
reverse mortgage enables older homeowners (62+) to
convert part of the equity in their homes into tax-free
income without having to sell the home, give up title,
or take on a new monthly mortgage payment. 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. Below are some common
questions asked by consumers about reverse mortgages.
What is
a
reverse mortgage?
A
reverse
mortgage
is
a
loan
that
enables
senior
homeowners,
age
62
and
older,
to
convert
part
of
their
home
equity
into
tax-free*
income-without
having
to
sell
their
home,
give
up
title
to
it,
or
make
monthly
mortgage
payments.
The
loan
only
becomes
due
when
the
last
borrower
(s)
permanently
leaves
the
home.
*
Consult
Tax
Advisor.
Not
all
products
available
in
all
states.
How is a reverse mortgage like
a home equity loan? How is it different?
Both a reverse mortgage
and a home equity loan use the
equity
you have built up in your home
to provide you with readily available
cash.
They differ in that with a home
equity loan you must make regular
monthly payments of principal and
interest. However, with a reverse
mortgage you do not make any monthly
mortgage payments for as long as
you stay in the home.
Can my
current income influence my ability
to get a reverse mortgage?
No. Since reverse mortgage
borrowers need not make monthly repayments,
there are no income qualifications.
What are the advantages of a
reverse mortgage?
There are many. Here are
a few of the most significant:
- Remain independent. A reverse
mortgage allows you to remain
in your home
and retain home ownership.
- Stay
in your home. It allows you to remain in your
home and retain
home ownership.
- No monthly mortgage
payments. You need not pay back the reverse
mortgage loan nor make any monthly mortgage
payments until you permanently
move out of the home.
- Tax-free
money. Because the money you receive from a reverse
mortgage
is not considered income, it
is tax free* and will not affect your
Social Security or Medicare benefits.
- Freedom and flexibility. The money you get from
a reverse mortgage
is yours to use in any way
you choose.
* Consult Tax Advisor
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I've heard that with a reverse
mortgage the lender would own my
home. Is this true?
It's absolutely false. The
borrower retains title to the property.
The
reverse mortgage lender is merely
extending a loan to the borrower.
Because the homeowners retain title,
they remain responsible for the payment
of property taxes, insurance, utilities,
home maintenance, and other expenses
- just as they would with a standard
first mortgage or home equity loan.
Can I refinance a reverse mortgage,
as I would be able to do with a traditional
home mortgage?
Yes. Refinancing can make sense
if your home increases in value or
interest rates drop.
Is it possible
for my loan balance to become greater
than the value
of my home?
No. You can never owe more than
what your home is worth. What's more,
since the reverse mortgage is what
is known as a "non-recourse" loan,
the lender cannot seek repayment
from your income, your other assets,
or your estate. In other words, the
house stands for the debt.
Can
a reverse mortgage lender take my
home away if I outlive the
loan?
No they cannot. And the loan
is not due at that time either. In
fact,
you don't need to repay the loan
as long as you or another borrower
continues to live in the house and
keep the taxes paid and insurance
in force.
How do you determine the amount
of cash I am eligible for?
The amount you can borrow
depends on several factors, including
your
age, the type of reverse mortgage
you select, current interest rates,
the location of your home, and the
appraised value of your home and
FHA's lending limits for your area.
In most cases, the older you are,
the more valuable your home, and
the less you owe on it, the more
money you can get.
Are there any limits on how I
use the money I receive from a reverse
mortgage?
You can use the money for
anything you choose, from daily living
expenses,
home improvements, healthcare expenses,
paying off existing debts, or simply
enhancing your retirement years.
For many people, the money provides
a "financial security blanket," in
case unexpected expenses arise.
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Is there
a choice in how I receive the cash from my reverse
mortgage?
Most definitely. With most
reverse mortgages you have a wide range
of
payment options, one of which should
be ideal to meet your financial needs.
- You can choose to receive the money
all at once, as a lump sum.
- You
can receive equal monthly payments as long as
one of the borrowers
lives and continues to occupy the property
as a principal residence.
- You can
choose to receive equal monthly payments for
a fixed period of
months.
- You can get a line of credit*; which
allows you to take funds at times
and in amounts of your choosing
until the line of credit is exhausted.
This is the most popular option,
chosen by more than 60% of reverse
mortgage borrowers.
- You can opt
for a combination of line of credit with monthly
payments
for as long as the borrower remains
in the home.
- Or, finally, you can
choose a combination of the above.
* Note: in Texas, lines of credit
are not permitted by state law.
Who can qualify for a reverse
mortgage?
Seniors 62 years of age
or older qualify. There are no income,
health
or credit qualifications.
I still
owe money on a first or second mortgage.
Can I still
get a reverse mortgage?
Yes. You may be eligible
for a reverse mortgage even if you
still owe money on a first or second
mortgage. The funds you would receive
in the reverse mortgage would be
used to pay off whatever existing
mortgages you have on the property.
Can I get a reverse mortgage on a
second home or resort property
I own?
Unfortunately no. Reverse
mortgages may only be taken out on
your primary
residence.
What kinds of homes
are eligible for a reverse mortgage?
First and foremost, the reverse
mortgage must be on the borrower(s)
primary residence, that is, where
they live most of the year. Most
reverse mortgages are taken on
single family, one-unit homes.
Some programs also accept two-to-four
unit buildings that are owner-occupied.
Some programs grant reverse mortgages
on condominiums and manufactured
homes built after June 1976. Mobile
homes and cooperatives are generally
not eligible for a reverse mortgage.
Would a home that is in a "living
trust" be eligible for a reverse
mortgage?
Yes. In most cases a homeowner
who has put his or her home in
a living trust can usually take
out a reverse mortgage. A review
of the trust documents would be
made by the reverse mortgage lender
to determine if anything in the
living trust would be unacceptable.
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Are all reverse mortgages the
same?
No, actually there are
three basic types of reverse
mortgages:
- Federally-insured reverse mortgages.
Known as Home Equity Conversion
Mortgages (HECM), they are insured
by the U.S. Department of Housing
and Urban Development (HUD).
They are widely available, have no income
requirements, and can be used
for any purpose. (For more on HECM
reverse mortgages, go to http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm)\
- Government-sponsored reverse
mortgages. A Home Keeper® is
Fannie Mae's conventional market
alternative to the Home Equity
Conversion Mortgage (HECM). It
is a government-sponsored enterprise
program and works like a HECM
loan in many ways. However, a
Home Keeper® reverse
mortgage addresses a few needs
that are not met by HECM loans,
such as individuals with higher
property values, condominium
owners, and seniors wishing to
use a reverse
mortgage to purchase a new home.
When will I have to pay the
principal and interests cost of
this loan?
Your reverse mortgage loan
becomes due and must be paid in full
when
one or more of the following conditions
occurs: (a) the last surviving
borrower passes away or sells the
home; (b) all borrowers permanently
move out of the home; (c) the last
surviving borrower fails to live
in the home for 12 consecutive
months due to physical or mental
illness; (d) you fail to pay property
taxes or insurance; (e) you let
the property deteriorate, beyond
what is considered reasonable wear
and tear, and do not correct the
problems.
What has to be repaid when the
loan becomes due?
When the last surviving borrower
permanently moves out of the home
or dies, the reverse mortgage loan
becomes due. The reverse mortgage
principal, interest charges, and
service fees (such as closing cost
fees) are paid from sale of the
house or other assets of the estate.
If I take a reverse mortgage, 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 must
repay the lender for the cash received
from the reverse mortgage, plus
interest and service fees. Any
remaining equity belongs to you
or your heirs. It's important to
remember that you can never owe
more than the home's appraised
value when it is sold. None of
your other assets will be affected
by your reverse mortgage loan.
Must the heir or the last surviving
borrower sell the property to repay
the reverse mortgage loan?
No. Repayment may be accomplished
by refinancing the reverse mortgage
with a traditional "forward" mortgage
loan, or through the use of other
assets.
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Other than repaying the
principal and interest, what
kinds of fees
are involved in a reverse mortgage?
Most reverse mortgages have
an application fee (which may
cover the cost of a credit report
and
an appraisal), an origination
fee, closing costs, insurance,
and a
monthly servicing fee. These
charges can be paid by the reverse
mortgage
itself, making them no immediate
burden to the borrowers; the
costs are added to the principal
and
paid at the end, when the loan
becomes due.
How much cash
will I have to come up with to cover
origination
fees and other closing costs?
One of the real benefits of
a reverse mortgage is that you can
use the money you get from your home's
equity (dependent upon final calculations)
to pay for the various fees that
are part of the loan costs overall.
The costs are simply added to your
loan balance, and you pay them back,
plus interest, when the loan becomes
due-that is when the last surviving
borrower permanently moves out of
the home or passes away.
Are reverse
mortgage interest rates fixed or variable?
All reverse mortgages have variable
rates that are tied to a financial
index and will vary according to
market conditions.
What is "TALC" and
why should I know about it?
TALC is short for "Total
Annual Loan Cost." It combines
all of the costs of a reverse mortgage
into a single annual average rate
and can be very useful when comparing
one type of reverse mortgage to another.
Reverse mortgages vary considerably
in features, benefits, and costs.
It's not always easy to compare "apples
to apples." If you are considering
a reverse mortgage, be sure to ask
the lender or counselor to explain
the TALC rates for the various reverse
mortgage products.
What are the tax consequences
of a reverse mortgage? What about
my Social Security and Medicare benefits?
Because reverse mortgages
are considered loan advances and not
income, the IRS considers them to
be not taxable. Similarly, having
a reverse mortgage should not affect
your Social Security or Medicare
benefits.
If you receive SSI, Medicaid, or
other public assistance, your reverse
mortgage loan advances are only counted
as "liquid assets" if you
keep them in an account past the
end of the calendar month in which
you receive them. You must be careful
not to let your total liquid assets
become greater than these programs
allow. It may be wise to consult
your tax advisor on this.
Another tax fact to bear in mind:
interest on reverse mortgages is
not deductible on your income tax
returns until the loan is paid off
entirely.
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If I take on a reverse
mortgage, how will it affect my
government benefits?
The funds from a reverse mortgage
do not affect regular Social Security
or Medicare benefits. You should
discuss the impact of a reverse
mortgage on federal,state or local
assistance
programs with a professional advisor,
such as your local Area Agency
on Aging (toll free at 1-800-677-1116),
an independent reverse mortgage
consultant*,
or a tax attorney.
* A list of approved counseling
agencies is posted on the Internet
by the
U.S. Department of Housing and
Urban Development, at www.hud.gov
I understand that
I must meet with an unbiased counselor before
completing my reverse mortgage
application. What does that accomplish?
This is a federally mandated
feature of the reverse mortgage
process and is designed for your
protection. The counselor, who
is from an independent government-approved
housing counseling agency, explains
in detail the pro's and con's
of all your reverse mortgage
alternatives.
He or she will discuss a reverse
mortgage's costs and financial
implications, should tell you
about any government or nonprofit
programs
for which you may qualify, and
advise you on any proprietary
reverse mortgages that may be
available
in your area.
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