Reverse Mortgage Explained

A Reverse Mortgage is relatively a new type of mortgage program to the banking industry. Many homeowners are skeptical about applying for a reverse mortgage and being a senior citizen and basically retired from employment can cause many concerns. Funding America can answer your questions and guide you in the right direction.

Summary: A Reverse Mortgage (RM)

allows owners to turn their home equity into cash without making mortgage payments or selling their homes. Contrary to a regular "forward" mortgage, which is paid off in monthly installments. When you get a RM the amount you owe increases each month as advances are made (you may take out more when you close your loan). The money you borrow is paid back until the owner either dies or moves out of the house, at which time the initial loan plus the interest must be paid back, usually through the sale of the home.

Why a Reverse Mortgage?
There are many advantages to a Reverse Mortgage such as helping seniors stay in their homes longer, helping seniors give an inheritance to their children while they are still alive to watch them enjoy it and relieving government pressure to provide more institutional care. RM's are not for everyone, however, and the products can be confusing, so it is important to shop around and consider all the options available.

Key Benefits

• Supplements income by transferring home equity to cash
• Advances are non-taxable resulting in greater disposable income than wages
• Minimizes an older borrower's need to work allowing enhanced quality of lifestyle
• Does not jeopardize other benefits that maybe tied to income levels

• Are there other housing or financial options that have not been considered?
• What are the initial costs (i.e., an application fees or house appraisal)?
• Are you required to seek legal advice?
• What are the on-going costs?
• What are the exit costs (any penalty for getting out of the plan early, are there additional legal fees or real estate fees)?
• Is there a "cooling off" period in the contract (we advise you discuss RM's with a third party, for example a financial advisor or a lawyer, before entering into an agreement)?

With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

• all at once, in a single lump sum of cash
• as a regular monthly cash advance
• as a "creditline" account that lets you decide when and how much of your available cash is paid to you
• as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

Borrowers are also required to attend financial counseling before closing — a crucial step that helps a borrower avoid paperwork potholes and learn more about the loan.

In today's mortgage market, it's imperative that our senior citizen homeowners aren't being taken advantage of by subprime lenders or predatory mortgage brokers. Counseling is highly invoked when a reverse mortgage loan commences.

Using the equity a homeowner has built up over the years can help a borrower detour away from public assistance programs. Seniors who rely on public assistance need to research the impact reverse mortgage payouts may have on their benefits.

The federal Truth in Lending Act (TILA) is one of the best protections you have with a reverse mortgage. TILA requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account.

A borrower should discuss the reverse mortgage loan option with family or other heirs before closing on the loan. An heir will need to be prepared to pay off the loan balance if the heir would like to keep the home. Open communication, along with strong monthly financial planning, is necessary to keep family affairs running smoothly. One possible financial plan is for the family or heirs to obtain and maintain life insurance on the borrower, with proceeds designated for paying off the loan balance.

A mortgage worksheet can be filled out and submitted for review or you can call the branch manager for a complete mortgage application.

Facts to Consider about Reverse Mortgages

Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month, because it is not paid on a current basis. The amount you owe increases over time as the interest compounds. Some reverse mortgages have fixed-rate interest; others have adjustable rates that can change over the lifetime of the loan.

The three types of reverse mortgages — FHA-insured, lender-insured, and uninsured — vary according to their costs and terms. Check the features of each to select the type that is best-suited for your needs. Before considering any reverse mortgage, consult with family members, your attorney, or financial advisor.

Reverse mortgages typically charge loan-origination fees and closing costs. Insured plans charge insurance premiums; some plans have mortgage servicing fees. You may be able to finance these costs if you want to avoid paying them in cash. But, if you finance the costs, they will be added to your loan amount and you will pay interest on them.

Your legal obligation to repay the loan is limited by the value of your home at the time the loan is repaid. This could include any appreciation in the value of your home after your loan begins.

HUD Reverse Mortgage Program

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed.

For example, based on a loan at today's interest rates of approximately 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent of the home's value, and an 85-year-old could borrow up to 56 percent of the home's value.

There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.

There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.

HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower's principal balance.

FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.

For any questions, you can contact us here.

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