Reverse Mortgage

A reverse mortgage (known as lifetime mortgage in the United Kingdom) is a loan available to seniors (62 and over in the United States), and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care). In a typical mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the first and only mortgage on the property.

Requirements

To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings, such as lower-value mobile homes, do not qualify. Before borrowing, applicants must seek free financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained.

Reverse mortgage proceeds

The amount of money available to the consumer is determined by five primary factors:

  • The appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house.
  • The interest rate, as determined by the U.S. Treasury 10 year T-Bill or the LIBOR index.
  • The age of the senior—the older the senior is, the more money he/she will receive. The HUD/FHA amortization table subtracts the senior’s current age from 100 years, and divides the maximum loan amount by the difference. The other reverse lenders also factor age in the same way, although each one has a slightly different way to determine expected life span.
  • Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest.
  • The location of the property, and whether the maximum loan amount is subject to the maximum loan limits. All these factors contribute to the Total Annual Lending Cost (TALC) as defined by the US Federal Government Regulation Z, the single rate which includes all the loan costs. The specific formulas to calculate the impact of the factors listed above can be found in Appendix 22 of the HUD Handbook 4235.1.

There is also a type of reverse mortgage for homes valued over the maximum Fannie Mae limit. These are called "cash" accounts, and are proprietary loan products. The money received (loan advances) are not taxable and do not directly affect Social Security or Medicare benefits. However, an American Bar Association guide to reverse mortgages explains that if you receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if his or her total liquid assets (cash, generally) is then greater than those programs allow. A borrower can elect to move available funds into a "set-aside" account, similar to a typical escrow account, to pay for his or her future property taxes and/or homeowners insurance. Currently, most reverse mortgage borrowers do not exercise this option and instead elect to be responsible for the payment of taxes and/or insurance on their own. It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage.

When the loan ends

The loan ends when the homeowner dies, sells the house, or, depending on the loan conditions, moves out of the house for 12 consecutive months (for example, to go into an assisted living home). At that point, the reverse mortgage can be paid off with the proceeds of the sale of the house, or be refinanced by the heirs of the homeowner's estate. If the proceeds exceed the loan amount, the owner of the house receives the difference; if the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance which the bank has on the loan) absorbs the difference. In most cases when the borrower moves out of the property or dies, as long as the borrower (or his estate) provides proof to the lender that he is attempting to sell the home or obtain financing to pay off the outstanding debt, the investor will allow him up to one year to do so. After the one year extension period is up, the lender cannot provide any further extension of time to the borrower (or estate).

The technical term for this cap on debt is "non-recourse limit." It means that the lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off.

Demand for reverse mortgages on the rise

As recently as December 2007 the Senate Committee on Aging spent time discussing the aggressive marketing and sales techniques being used by mortgage institutions to attract senior homeowners into purchasing reverse mortgages. As larger populations of seniors are turning 63 every year, the demand for reverse mortgage loans is on the rise. There was a 56% increase in these types of loan in 2006 from the prior year. The Federal government in December 2007 removed the restrictions on the number of outstanding reverse mortgage loans they would underwrite at any given time. Prior to the new legislation, the original limit was 275,000. Many large banking institutions have become involved, including Bank of America which acquired Reverse Mortgage of America, a division of Seattle Mortgage Co. This is one of many acquisitions occurring in the mortgage industry to corner the reverse mortgage loan market. It is this activity that has gained the attention of the Federal and State governments. Congress is expected in 2008 to put more laws into place that provide stronger protections and minimize the commissions and flat fees mortgage companies can charge per loan.

If you’d like more information on Reverse Mortgages please refer the following link: www.mylifetimeincome.com.

Related Sites  (exchange links with this article)

Reverse Mortgage Information - guide to long term care.com - Guide To Long Term Care - long term care insurance information and quotes.

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