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QUESTIONS
AND ANSWERS ON
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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 becomes due when the last borrower (s) permanently
leaves the home.
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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 required monthly mortgage payments for as long as you stay in the home.
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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.
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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 required. 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, hazard insurance, and maintaining the home in reasonable
condition - just as they would with a standard first mortgage or home equity loan.
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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 and/or interest rates drop.
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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 as the primary residence and keep the taxes paid and hazard insurance in force.
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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 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.
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Are there any limits on how I use the money I receive from a reverse mortgage?
You can use the money for almost 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".
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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 may 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.
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Who can qualify for a reverse mortgage?
Seniors 62 years of age or older may
qualify. There are virtually no income or credit qualifications.
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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 from the reverse mortgage
would be used to pay off whatever existing mortgages you have on the property.
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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.
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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
offer reverse mortgages on condominiums and manufactured homes built after June 1976. Mobile homes and cooperatives are generally
not eligible for a reverse mortgage. Click here to contact the Financial Freedom representative nearest you to determine if your home is eligible.
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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 revocable living trust can usually take out a reverse mortgage. A review of the trust documents
would be conducted 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 almost any purpose. (For more on HECM reverse mortgages, click here.)
- Government-sponsored reverse mortgages. A Home KeeperŪ 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 KeeperŪ 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. (For
more on Fannie Mae Home Keeper reverse mortgages, click here.)
- Proprietary reverse mortgages. These are private loans with unique features that often benefit seniors
with higher value homes. An example of such reverse mortgages, which are backed by the companies that develop them, is Financial
Freedom's Cash Account Advantage Plan. (For more on Cash Account Advantage Plan reverse mortgages, click here.)
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What are the main differences between a HECM reverse mortgage and a proprietary product like Financial
Freedom's Cash Account Advantage Plan?
In general, the HECM product may offer
a higher loan amount for a lower valued home (for example, under $500,000) depending upon the loan amount caps in specific
counties/MSAs, the amount of equity in the home, and the age of the borrower. For a higher valued home with significant equity,
a senior may be likely to qualify for a larger cash payout through a Cash Account Advantage Plan reverse mortgage. Cash Account
Advantage Plans are not currently available in all states. (For more on Financial Freedom's Cash Account Advantage Plan reverse
mortgages, click here.)
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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; (d) the borrower fail to pay property taxes or hazard insurance; (e) the borrower does not
maintain the home in reasonable condition.
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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, monthly
service fees and other accrued fees are paid from sale of the house or other assets of the estate.
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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 as your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage,
plus interest, monthly service fees and any other accrued costs. 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.
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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, 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 from the proceeds of the reverse mortgage, resulting in no immediate burden to the
borrowers; the costs are added to the principal and paid with interest when the loan becomes due.
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Are reverse mortgage interest rates fixed or variable?
Most reverse mortgages extended to seniors
to date have variable rates that are tied to a financial index and will vary according to market conditions. However, Financial
Freedom recently began offering a fixed rate HECM program.
Click here to learn more about Financial Freedom's Suite of HECM Products.
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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 and
counselor to explain the TALC rates for the various reverse mortgage products. |
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ADVANTAGES AND DISADVANTAGES
of a reverse mortgage.
The first disadvantage is the relative cost of a reverse mortgage. Reverse mortgages tend to be very
expensive when compared with a conventional mortgage. This is due to the rising-debt nature of reverse mortgages. For example,
a typical reverse mortgage may provide a homeowner with a $300 per month payment with a yearly interest rate of 12 percent
compounded monthly. Over the course of ten years, the homeowner will receive $36,000 in payments, but will owe almost $70,000-almost
twice as much as received.
The second disadvantage is the complex and confusing contracts of reverse mortgages, that
can have a tremendous impact on the overall cost of a reverse mortgage to the borrower. The complexity of the contracts often
allow lenders and third parties involved in arranging reverse mortgages to not fully disclose the loan's terms or fees. These
numerous other front-end and/or back-end fees can also quickly drive up the cost of a reverse mortgage. These fees can include
origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity and shared appreciation
fees.
Out of all these fees, the shared equity and shared appreciation fees should be avoided, as they can quickly
raise the cost of the mortgage without providing any benefit to the borrowers. As an example, a shared appreciation fee can
give a lender an automatic 50% interest in the difference between the current value of the home when the loan is signed and
the appreciated value of the home when the loan is terminated. What makes the fees unfair is the fees have no relation to
the amount that is borrowed.
The third disadvantage is the reverse mortgage payments can affect eligibility for old
age pensions, Medicaid, or supplemental Social Security income. Senior's may not even realize this problem until after they
already have their reverse mortgage, and only then do they find out that this can have the opposite affect on a seniors finances
then what they were trying to accomplish in the first place by taking out the reverse mortgage.
Another disadvantage
is the fact that reverse mortgages reduce the value of a senior's assets and estate. This will affect the amount of inheritance
received by the borrower's heirs.
How to avoid these hazards
The best way for a senior to avoid these hazards
is to be careful when choosing a lender, by obtaining bids from three separate lenders. They should take these contracts to
a reverse mortgage counselor for evaluation. This will allow them to accurately evaluate the three contracts before deciding
on best one for their situations.
NEVERTHELESS CONTINUES TO BE A GREAT PRODUCT
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