How To Obtain a Reverse Mortgage for Senior Homeowners
For an increasingly large number of senior homeowners, reverse mortgages are an attractive financing option that affords them the opportunity to remain in their own homes and receive much-needed funds. A reverse mortgage is an exact replica of a traditional mortgage-in reverse. Instead of repaying a lender, homeowners utilize the equity they have built up in their homes to receive payments from the lender.
There are several criteria that must be met before a consumer is eligible for a reverse mortgage. Potential borrowers must be 62 years of age or older and live in their own home. Borrowers must also own their homes outright or have significant equity in their homes. Individuals with remaining balances on a first or second mortgage may be eligible for a reverse mortgage, but those mortgages will have to be paid off with the proceeds from the loan first. Single-family homes, manufactured homes, condominiums, and townhomes are all eligible properties.
There are no income, credit, or employment requirements to qualify for a reverse mortgage. The amount a borrower receives is dependent on age, interest rates, and the overall value of their home. Older borrowers will generally receive more than younger borrowers and home values are a major factor in determining the payout amount of the loan.
Borrowers are required to meet with a reverse mortgage counselor before obtaining a loan. Counselors are independent professionals who provide education about the mortgages and can suggest other alternatives. For a list of counseling agencies approved by the U.S. Department of Housing and Urban Development, visit www.hud.gov or call (800) 569-4287.
Once a borrower has obtained a reverse mortgage, there are several payment options available to them. A lump sum payment gives borrowers the total amount of the loan in a single payment. Fixed monthly payments allow loan recipients to receive payments for a set time period varying from several months to up to life. A line of credit lets borrowers utilize funds from the loan at any time. According to the National Reverse Mortgage Lenders Association (NRMLA), “The most popular [payment] option-chosen by more than 60 percent of borrowers-is the line of credit.” The flexibility provided by a line of credit is the primary reason for its popularity.
*Using the Funds*
The proceeds from a reverse mortgage can generally be used in any way that the borrower desires. Borrowers frequently use the money to fund home repairs or modifications that will make aging in place easier and more comfortable. They may also opt to use the proceeds from the loan to cover rising health care or prescription drug costs. Obtaining money to pay off property tax bills and existing debts are also reasons that borrowers cite for seeking a reverse mortgage. Other consumers are looking for additional funds to enhance their lifestyles. This type of borrower may use the funds from a reverse mortgage to take vacations or purchase luxury items.
*Paying Back the Loan*
A reverse mortgage is due only when the last remaining borrower moves from the home, dies, or sells the home. Loans are repaid through the sale of the home. Therefore, the amount a borrower owes can never exceed the value of their home. Reverse mortgages have no affect on other assets and any debt associated with the loan cannot pass on to the borrower’s estate. Also, the NRMLA points out that if a home is sold and “the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to . . . [the] estate.”
*Popularity of Reverse Mortgages*
Reverse Mortgages have grown dramatically in popularity in recent years. The escalating cost of living, combined with the desire of seniors to remain in their own homes for as long as possible, has led to an unprecedented increase in the amount of loans. The NRMLA notes that in 2004 “lenders originated a record 37,829 HECM loans . . . a 109 percent increase over the 18,079 loans closed the previous year.” NRMLA credits this tremendous growth to increased understanding of the consumer protection features that are inherent in reverse mortgages. Such features included standard and capped interest rates, independent counseling, no prepayment penalty, and asset protection, among others.
In the past, reverse mortgages have been misunderstood and have faced many misconceptions. As more seniors receive accurate information, the loans continue to grow in popularity. Reverse mortgages are not the financial solution to every problem, and they are certainly not right for everyone. However, for seniors who wish to remain in their own homes for as long as possible, they are an important option that should be considered.
For more information, visit the National Reverse Mortgage Lenders Association’s (NRMLA) website at www.reversemortgage.org or the U.S. Department of Housing and Urban Development’s website at www.hud.gov.
*Quick Facts about Reverse Mortgages:*
Types: Home Equity Conversion Mortgage (HECM) – This federally-insured private loan program is administered by the Department of Housing and Urban Development (HUD). Like all reverse mortgages, this loan requires that the borrower be 62 years of age or older and own their home or have significant equity in their home. Loan applicants must currently live in the home. Additionally, individuals must complete free mortgage counseling from HUD-approved counseling sources.
Single-purpose reverse mortgages-Provide borrowers with smaller loan amounts to pay for express costs. These mortgages are generally offered by state or local government agencies for a specific reason. Often these loans are used to pay for repairs or home modifications, allowing seniors to remain in their homes. They also may be offered to help pay property taxes. They are not available in all areas; check with your local Office on Aging about loan availability.
Proprietary reverse mortgages-Generally the type of loan individuals are referring to when they mention reverse mortgages. These reverse mortgages are not federally insured and are offered by banks, mortgage companies, and other private lenders. Mortgages are backed by the companies that develop them. Although proprietary reverse mortgages are generally more expensive than the other types, there are no restrictions on how the money can be used. Loan advances are generally available to quickly provide borrowers with much needed funds.
*General Features of all Reverse Mortgages:*
Social Security and Medicare benefits are generally not affected by reverse mortgages. Seniors should consult with a benefits advisor in order to ensure that there will be no change in their benefit status.
Homeowners retain the title to their homes until they die, permanently move from the home, sell the home, or reach the end of their loan period. This is beneficial for seniors because a move is considered permanent only after 12 consecutive months out of the home. Seniors could therefore live in an assisted living or nursing facility for recovery or rehabilitation and return to their homes without affecting their loan.
Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month. Therefore, the amount that the loan recipient owes increases significantly with time.
At the end of a reverse mortgage term or when the homeowner dies or moves, there will be little or no equity left in the home. There are fewer assets for the homeowner and his or her heirs.
Lenders can determine which fees will be charged and the rates for those fees. Fees include origination fees, closing costs, and servicing fees.
Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Homeowners are still responsible for taxes, insurance, utilities, maintenance, and other housing expenses.
Information adapted from the Federal Trade Commission’s consumer article, “Reverse Mortgages: Proceed with Care.”
For more information, please visit this helpful website: http://www.homeownersinsurance.org/additional-resources/how-reverse-mortgages-work/.