The Reverse Mortgage program, is an FHA home mortgage loan designed to provide qualified senior home owners different financial loan options to be able to help maintain a comfortable quality life style.
Many seniors today are finding it harder to maintain their living expenses do to a sharp and steady rise in property taxes as well as home owners insurance rates. As Seniors get older, medical expenses usually rise as well and even though energy prices have dropped below expectations, food prices and other living expenses in the form of unavoidable costs like auto parts and hourly repair rates and home appliance repairs like AC and heating for the home just to name a few.
All of these expenses add up and every month it gets more difficult for senior home owners typically on a fixed income to make ends meet.
One way for Qualified senior home owners to fight the “Battle of the Budget”, is to get a Reverse Mortgage, but not every senior home owner will qualify for a Reverse Mortgage. In order to qualify for a Reverse Mortgage, you will have to have a substantial amount of equity in your home.
There several big and important issues to deal with when considering a Reverse Mortgage:
The first issue is that although it is true that no mtg payment will ever be required again, this home mortgage loan will close in your name and you will still be required to maintain the taxes and insurance of the property. Some fear that anyone who takes Reverse Mortgage loses control of his mortgage. The truth is that there is no rule that says you are not allowed to pay the interest or to make interest and principal payments
The second issue is inheritance. If you qualify for a Reverse Mortgage, than what you qualify for is an interest only home loan that allows you to skip the interest payments. The way this is done is very simple. If you decide not to pay the interest, the interest expense is simply added to your home mortgage balance. Over time more and more is owed on the property and if you live an additional 10 or 20 years without making any principle or interest payments on your Reverse Mortgage, the balance of what is owed on the property will be much higher, and if property values remain mostly stagnant in that period of time or have even gone down, there will be less for your children or grand children to inherit.
So if you qualify for a Reverse mortgage, you will have an option to stop making mortgage payments, which will eliminate with very few exception your biggest monthly expense. Senior home owners struggling to make their mortgage payments will find this option to be a tremendous help and relief from the stress of watching their savings drop month after month.
Home owners who have their homes paid off and Qualify for a Reverse Mortgage by age and property type, have more options. The options these paid off homeowners have is to borrow anywhere from 40 to 60% of the accepted appraised value of their homes in several different ways, either all at once called the ” Lump Sum Program “, or in monthly payments called the ” Monthly Payment Program ” and the Line of Credit Program ” The final option is a combination of “All of the above ”
Two of the three Reverse Mortgage options available that are the most sensitive to address the inheritance issue, are the Monthly payment program and the Line of Credit program.
With the Monthly Payment Program, the balance of what is owed on the home only goes up by what you borrowed in the form of monthly payments and the interest expense to carry the sum of the monthly payments.
The Line of Credit program is the most popular program for Qualified Senior Home Owners with homes valued at more than $600,000 that are paid off because in the line of credit program you get the choice of taking the least amount which is $25,000. The most attractive features of this program is that the initial interest rate charge on the loan is only on $25,000 and that means that the interest expense on the loan is more than ten time less than if you had borrowed the full $300,000. The best feature of taking the least amount out of your reverse mortgage credit line, is that if you were eligible for a total of $300,000 in the form of a credit line, and you only take $25,000, the other $275,000 that you are eligible for earns interest, and if interest rates rise, the rate of interest you receive also rises, which is pretty cool. Better yet, if you don’t use the other $275,000 , you don’t owe that other $275,000 on the home, and your heirs if you wish will clear more money when the time comes sell your home.
Now if you go through the first $25,000 taking advantage of deals, home repairs, whatever and need a bit more money, you can get more, but you cannot draw out the full amount until one full year has passed after you close the Reverse Mortgage Line of Credit loan because the closing costs are much less than the Lump Sum Program.
With the ” Lump Sum Program ” using our previous example of a $600,000 home eligible for a $300,000 plus pay-out, the loan amount will be in the $300,000 range, but the interest expense going forward is on $300,000 which is more than ten times more per year than just taking the minimum $25,000.
So if you do not have plans to buy an annuity or additional home to rent and are just seeking to keep your financial options open in the case of an emergency, the minimal Line Of Credit reverse Mortgage options is much more suitable for you and your family, and this is exactly why.
If you secure a minimum line of credit of $25,000 and 6% the yearly expense on a flat scale would be $1500 a year but for a $300,000 loan, the interest expense would be a whopping $18,000. Now as the balance grows, the interest expense grows and the futures inheritance of your heirs begins to evaporate with the interest expense if you live more than 10-20 years. These two Reverse Mortgage programs, the line of Credit and The monthly payment program will do the most in protecting your family’s best interest.
If you love your children and are willing to tough it out for them, we applaud your commitment.
If your children are doing well but you are struggling for cash and do not want to burden your family with financial assistance or cannot bare to sell your belongings or beloved home in order to downsize into a smaller apartment or assisted care facility, the reverse Mortgage program will allow you to live the remainder of your life with dignity and the satisfaction of knowing that your spouse if you have one, will be okay long after after you are gone if need be.
The only negative aspect of a reverse mortgage is that the more you take, the less there is to leave your children to inherit down the road which is not a concern if you do not have children.
So if your home is paid off but you do have children and grand children you care deeply about and want to leave as much as possible for them, the minimum line of credit or the monthly payment program or a combination of monthly payments and line of credit with some sensible spending discipline will be your best bet for you and your family.
“For seniors who need a way to tap into the homes equity without selling, moving, or having a mortgage payment to worry about, the reverse mortgage is the best option. No wonder every year some 80,000 seniors choose the HECM reverse.”
There are many benefits to choosing a reverse mortgage:
· 1. Retire in the comfort of your own home.
· 2. Pay off your existing mortgages and eliminate the obligatory monthly payment.
· 3. Fund you received from the HECM reverse mortgage is tax-free income.
· 4. You choose how you receive the income; monthly, as a credit line, or as a lump sum payment.
· 5. HECM is extremely safe program that allow you to access your equity during your retirement.
· 6. Leave the home to your heirs and any equity remaining goes to your estate.
· 7. Heirs are not responsible in the case you owe more than what the home is worth.
· 8. No restrictions on how you spend the funds you receive.
· 9. Improve your quality of retirement by eliminating any mortgage payments and having access to your equity.
· 10. As of June, 2014, it is very easy to qualify with no income or credit scores required.
· 11. You can include paying off other loans/bills/debts to become debt free and reduce the amount you pay each month for your bills.
· 12. Highest loan limit still set at $625,000. Jumbo reverse mortgages are also available.
· 13. No obligation to repay the loan while you live in the home. Your home will naturally increase in value to offset the reverse mortgage as you age in place.
· 14. HECM for purchase allows seniors to buy a home with minimal down and without having to pay a mortgage payment.
· 15. Interest rates are still at an all time low in 2014.
· 16. Protect your equity by tapping into it before any real estate market crashes occur (you can protect half of your homes value as a lump sum payment).
· 17. Facing foreclosure? Reverse can help get out of foreclosure by paying off your existing loan thus getting you out of that tight spot.
· 18. Use reverse mortgage income similarly to an annuity investment with no out of pocket investment. This will increase how long your savings will last during your retirement.
· 19. Live independently, no need to depend on heirs for money during your retirement.
· 20. Flexibility to move, stay, or sell the home as you wish. You do not need lender permission to sell your home so if the time is right and you wish to do so go right ahead. You are not constraints by taking a reverse mortgage loan.
“For seniors who need a way to tap into the homes equity without selling, moving, or having a mortgage payment to worry about, the reverse mortgage is the best option. No wonder every year some 100,000 seniors choose the HECM reverse.”
There are also many cons to getting a reverse mortgage; this is not a perfect product for all seniors:
· 1. This is not free money. Instead, it is a loan, and there are some closing costs available.
· 2. Loan balance increases over time.
· 3. Can impact your Medicaid eligibility.
· 4. Not tax deductible.
· 5. You continue to pay for property taxes & insurance.
· 6. Mandatory counseling is mandatory prior getting an FHA case number.
· 7. You pay for the FHA appraisals out of pocket, not the lender.
· 8. Financial underwriting may turn into reality over the coming months making income and credit scores a requirement in order to qualify.
· 9. Set aside taxes escrow. In some cases, you will be required to keep a chunk of the proceedings in an escrow account to cover your ongoing taxes and insurance for the home.
· 10. You must live in the home as your principal residence and for the majority of the year.
In any situation in life we have to look at both the pro and cons, see which outweigh. Taking out an HECM loan is just another one of those situations; you have to ask yourself whether the positives of the program outweigh the negatives. By looking at the facts, you can see that there are a lot more pros than cons. The majority of people who are considering a reverse mortgage loan realize that this loan is quite special in that all the features were specially designed for them, and these are the folks who would tell you just how great this program is.
REVERSE MORTGAGE PROS EXPLAINED IN PLAIN ENGLISH IN GREATER DETAIL.
1. Retire in the comfort of your own home
The program allows borrowers to stay in their home (no need to sell/move). If you compare this to the “other” options, you have in your retirement to access your equity – the HECM program is the only one that gives you access to the equity while allowing for you to live in your home with no mortgage payments. This unique feature is one of the main pros
2. Pay off your existing mortgage – eliminate mortgage payments
The HECM mortgage allows borrowers to pay off any existing mortgages on the home – therefore eliminating any current mortgage payments. As long as the homeowner lives in the property (has to be your primary place of residence) and meets the requirements for maintenance and paying the home’s property taxes and insurance, they will have NO monthly mortgage payments.
3. Tax free income – no taxes on funds released
The money you receive from your reverse mortgage is tax-free – so if you decide to release a portion of your equity from your home you will not pay taxes on this income/funds.
4. Choose how you receive the income/funds
The borrower will receive the payments on flexible terms; it is totally up to you the borrower. You can receive your income as either monthly payment, a lump sum, as a credit line or any combination of the above. There is also a choice of fixed rate or adjustable rates – having the ability to decide how to receive your hard earned equity is precious in your retirement – with the reverse loan you control you will spend and receive the money from your equity.
5. Safe government insured solution to access money in retirement
The program is insured by the federal government FHA (Federal Housing Administration) – this creates peace of mind knowing that the program is being monitored by the government and that there are no chances for the bank stop making payments or freeze your equity. In the 2008 mortgage meltdown many banks were cutting off credit lines as consumer credit scores dropped and home values dropped – this cannot happen as the reverse loan is insured by the FHA (this is one of the safest mortgage programs on the market as it has been designed for seniors in mind).
6. Leave the home to your heirs or remaining equity
You can leave your home to your heirs and any future equity that builds up belongs to you or your family/trust/estate. The reverse mortgage balance increases with time but so does the value of your home – when you take a reverse loan you will only have access to a portion of the equity roughly 50-70% so from the start there will be a portion of the equity there (in place for your protection and so that your legacy can remain even after you pass). When the loan becomes due your heirs/estate/trust will have the ability to sell the home and or refinance to keep the property.
7. Heirs not responsible for your mortgage debt
Your heirs with never be personally liable for your mortgage debt, therefore even in the worst-case scenario that your home value becomes less than the outstanding mortgage debts they will not be liable. Property values increase and decrease over time – therefore if the worst-case scenario happens and the home is not worth as much as you would have liked (and there is reverse mortgage loan) you do not have to worry about your heirs paying for your loan (the HECM is insured by the FHA).
8. Use the money how you want – no restrictions on spending
There are no restrictions on how you can spend your money – you are in the drivers seat. Remember there is no income tax or any other taxes place on your equity when you decide to release it – this is very important and gives you the borrower maximum flexibility with your hard earned equity. Whether you are looking to do home improvements, increase your retirement income, go on a vacation, the list is infinite and there are never restrictions placed on your equity income/funds.
9. Quality of life in retirement
This is your golden years, if you have worked hard it is now time to enjoy the fruits of your labor – whatever you define as a quality retirement the reverse mortgage can help it make a reality. Receiving extra income for life can improve the quality of your retirement. Having access to a credit can allow you to make needed home improvements and replenish your retirement funds. Being able to eliminate your mortgage with an HECM standard loan is a unique aspect that can completely change the way quality of your retirement.
10. Easy to qualify – no income or credit scores needed
Requirements to qualify are pretty straightforward, you have to: own home, be aged 62 or older, and have never defaulted on government debt. If you read our quick introduction than you know that the other options all have some form of credit underwriting to go through – this is not the case with a reverse loan. Since the FHA backs the program and since it has been specifically designed for seniors in mind the program does not require you to have credit, income (those even with BK, close to foreclosure qualify).
11. Include other debts into the loan – pay off any other debt
The program allows you to include other debts into the loan (with sufficient equity), for example: credit cards, medical bills, car loans, and any other loan or personal debt you may have. Studies show that retiring without monthly mortgage payment or other bill payments can reduce stress, which increases the quality of retirement. Also, you have to calculate the interest savings that you can achieve by considering this option – if you have a car loan at 10%, credit card at 20% – any debt that is higher % than the actual reverse mortgage loan you can essentially consolidate into the reverse and save a lot of money in interest every year.
12. 2014 loan limit is at $625,000
This is the highest it has ever been; therefore, you can borrow more of the equity tied up in your home. The loan limit can drop in 2015 and so many potential borrowers will not qualify. This limit means that if your home is worth $1million the real value that the banks will use is the limit to establish how much you can borrow – a higher limit means more equity you can release – as mentioned limits can decrease and this can impact your chances to quality.
13. No obligation to repay the loan
If you “outlive the loan,” or in technical terms receive more income than the home is worth, you will not have to pay that back. This is because you will never owe more than the value of the home (according to the Federal Trade Commission). Once the last living borrower passes, the home is sold or no longer lived in as a primary residence; there will be 12 months time frame after leaving the home that the loan is called or due. (So if medical conditions arise you have 12 months to return home).
14. No payments due
Once the last living borrower passes, the home is sold or no longer lived in as a primary residence; there will be 12 months time frame after leaving the home that the loan is called or due. (So if medical conditions arise you have 12 months to return home).
15. Remaining equity belongs to your heirs
After the home is sold, and the loan/fees are paid back to the lender, any remaining equity in the home belongs to you or your heirs/estate.
16. Reduced costs – lower fees in 2014
In 2014 lenders have started to dramatically reduce closing costs involved with reverse mortgages, therefore, giving you more of your equity. The HECM Saver has the lowest closing costs and insurance costs, but you cannot receive as much equity. Depending on when you are reading this, we have even seen a no fee reverse mortgage loan when the closing fees (origination fee) are waived or paid for in the interest rates. The main con about the reverse mortgage has always been the high upfront costs but with these changes seniors can now benefit from using the home equity while in retirement.
17. Lowest interest rates in history
Were you waiting for interest rates to drop – well they are now in historic low’s – interest rates for the HECM program are traditionally higher than forward mortgage rates – but with the current market conditions the Fed has maintained rates at historic lows to spark a refinance boom and allow those who have equity to release at the lowest cost in history. For more information about HECM rates -visit reverse mortgage rates
18. Facing foreclosure? Reverse can help get out of foreclosure
The reverse mortgage can be used as a tool to get out of pre-foreclosure or foreclosure. In some instances, you can still receive a reverse mortgage even if you are in bankruptcy. You should consider this as an option if you have equity available in the home but have falling behind due to the payments – while not always the right solution to this problem if you have fallen on hard times (own your home and have equity and are 62+) you should have a review of the HECM loan in order to avoid the foreclosure process.
19. May protect you against home prices falling
If you lock in a loan today and take out the equity at a low fixed interest rate then there will be no risk if home prices drop as you will have locked in your current loan based on current home prices. (Long-term home prices will increase or so we expect them – but there will always be dips in the real estate market) Your goal as the homeowner is to protect your nest egg – you have worked hard to build the homes equity over time and while you are now in retirement your new job is to protect this equity (consider the reverse if you know that your home can continue to drop in value, and you have a 1st mortgage which you can pay off). That strategy will reduce your risks – while maiming the upside potential (which is home prices increasing more equity for you or your heirs).
REVERSE MORTGAGE CONS ALSO IN PLAIN ENGLISH EXPLAINED IN GREATER DETAIL.
1. Not free to get a reverse – closing fees involved
Mortgages are expensive in general; the HECM program has reduced its fees tremendously over the years and with our free comparison service we will work hard to find you the best HECM loan. (The HECM saver reduces the fees substantially and some lenders are now no longer charging origination fee’s either). While a lot of the scenarios depend on the actual borrower the HECM loan can be pricier than a regular refinance (mainly since there is a mortgage insurance premium which is paid upfront) – if structured right you should not pay more to receive a reverse mortgage when compared to your other 4 options (no fees reverse mortgage). Also to keep in mind the features found in a reverse mortgage are unique no other loan offers those – at reverse mortgage lenders direct we love comparison shopping lenders to find you the best one.
2. Loan balance increases
Over time, the loan balance increases and the value of the estate or inheritance may also decrease. Essentially the reverse mortgage is adding the monthly mortgage payments back onto the principal of the loan (so you never have to make a mortgage payment, but the actual loan balance is accruing interest and growing). We expect that your home will continue to increase in value at a normal pace which should keep up with the rate of the reverse mortgage – while this will not always be the case in the long term you will maintain the same amount of ownership in your home if you home can increase at roughly the same level as market rates (very likely in the long term.) Example – if you take out a credit line for $100,000 today and your home value is $200,000 you own 50% of the home (or 50% of the equity is still in the property right) if you are borrowing at 4% fixed – and your home maintains a 4% increase year over year then you will maintain that 50% ownership (even though your loan would increase your home value would also increase).
Medicaid and other need-based government assistance are affected if too much funds are withdrawn and not spent (in one month). On the plus side, neither Social Security nor Medicare is affected by the loan.
4. Not tax deductible
The interest on the home loan is not tax deductible until the loan is paid off.
5. You pay for property taxes & insurance
With the program, you will be responsible for paying for property taxes and insurance. To be fair, this is not really a con since either way you would have this expense – as long as you own the home you will have this expense with any other mortgage (4 options above for example) there is no way to avoid neither costs unless you are renting and do not own a home.
6. Mandatory counseling – small fee
Before getting an HECM loan, you will have to take part in a mandatory counseling program, this costs roughly $90-$150. Some may view this as a pro since it protects seniors, we also view this as a pro because a second opinion is great for when making a life long decision; the only reason it is listed as a con is because it does usually cost money to receive the HUD counseling (and since it is mandatory you are forced to pay for this minimal fee). There are some government-sponsored entities, which can do the mandatory counseling for free.
7. You pay for the FHA appraisals
You must pay the fee for the FHA appraisal services – this usually amounts to $350-$450. FHA appraisals are the third part not chosen by the lenders to get the real value of the property. Lenders cannot argue the value of the home, as HUD implemented independent appraisers will appraise it. Due to the recession many of appraisals have been coming up short (due tougher standards which the appraisals are applied under FHA). Equity is the most important aspect to qualify for a reverse mortgage, so if you know that you are close to not qualifying (use our free reverse mortgage calculator).
8. Financial underwriting may turn into a reality
Some top HECM lenders are now implementing financial underwriting that makes it tougher for seniors to get a reverse mortgage (they are in test mode right now – so some lenders are just starting to test this features). Many will have to document their income and credit scores if dealing with these lenders. Currently still offer a no income any credit reverse, which is through our partner lenders who are all FHA/HUD approved.
9. Time consuming to learn about the program
This is not the easiest program to understand – we get that – a con is that it might take you 10 hours or more to fully understand all the in’s and out’s of the program – since we are not a bank/lender/broker we would be happy to assist you (in giving you everything you need to know without any fees or strings attached). We are believers in the program but also understand that it is not for everyone and that there are cons, which should impact your final decision.
10. You must stay put or else can set off loan payment
With a reverse mortgage, you must live in the home as your primary residence – you must maintain the home – if something happens to you and you go into a nursing home for 12 months or longer the bank can call up the loan. While the program is safe and insured by the federal government, the loan has terms and conditions – one being that in order to keep in good standing you must not leave the property for 12 consecutive months – or else the bank may ask for repayment.