Reverse Mortgages: Get Cash for Your Equity
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If you’re at least 62 years old and own your home, you can boost your income with a reverse mortgage.
Soaring home prices have made banks eager to offer the largest reverse mortgages ever. These loans turn
the equity in a house or condominium into tax-free income while allowing the home owner to live there for the
rest of his/her life. The money is paid in a lump sum, in monthly installments or as a line of credit.
A reverse mortgage typically doesn’t have to be repaid until the home owner dies or sells the home. The loan
also pays for insurance that protects the bank if the borrower outlives the value of the home. After the owner’s
death, his heirs can either pay off the loan and keep the home or sell it to satisfy the debt.
Reverse mortgages are most useful for people with valuable homes but little income. They can spend the
money any way they wish—on living expenses, medical bills, even travel.
Who qualifies
A reverse mortgage is available only on your primary residence. It can be refinanced if the home appreciates
or interest rates drop. There are no income or credit requirements.
As with a regular mortgage, you’re responsible for keeping the home in good condition and paying for
homeowners’ insurance. The lender can demand early repayment if you let the home deteriorate, so you
must decide if you are up to maintaining it. Be sure that you can afford to pay someone to do the chores when
you no longer can do them.
Drive-by inspections are conducted every four years. If deterioration is spotted, a full inspection is required.
How it works
The size of the mortgage depends on...
Your home’s value. The more your home is worth, the more you can borrow.
Your age. The older you are, the more you can borrow because the lender expects to be repaid sooner. Rule
of thumb: Subtract 10 from your age to get the percentage of your home’s value that you can borrow.
Current interest rates. The lower the interest rate, the more you can borrow.
The type of loan program you choose. There is more than one type of reverse mortgage available...
FHA reverse mortgages (available through HUD). About 90% of reverse mortgages are arranged through
banks and mortgage companies via the Federal Housing Administration’s Home Equity Conversion
Mortgage (HECM) program. Amounts vary by region.
Federal law requires anyone considering a HUD reverse mortgage to get counseling from the US
Department of Housing and Urban Development (HUD). 800-569-4287, www.hud.gov (click on “Senior
Citizens,” then “Reverse Mortgages for Seniors”).
Proprietary mortgages. Fannie Mae Home Keeper Mortgages offer loans of up to $417,000 through banks
and mortgage companies. The amount you can borrow is based on your home’s appraised value or Fannie
Mae’s loan limit for your locale -- whichever is less. For more information, go to www.efanniemae.com
(search under “home keeper”). Drawback: The rate is higher than on an HECM and you can borrow less
relative to the home’s value.
Cash accounts. This type of loan, available from any reverse mortgage lender, often is a better option than a
Fannie Mae reverse mortgage for homes worth more than the FHA limit (currently in the $300,000 range). No-
closing-cost and no-points options are available, unlike with government loans.
Expenses to watch
Interest rates are adjustable. Monthly interest charges are added to the balance of the loan, so the borrower
never has to make a payment. While these charges increase the balance of the mortgage, you or your heirs
will never have to pay back more than the value of the house at the time of the sale.
Closing costs can be higher than on a conventional loan. These costs also are rolled into the loan. They
include 2% of the home’s appraised value for insurance to continue making payments should the borrower
outlive the home’s value... 2% of the loan’s value in points... a monthly service fee... and standard closing
costs for the area.
A reverse mortgage calculator is available at the National Reverse Mortgage Lenders Association site, www.
nrmla.org, and the AARP site, www.aarp.org. Because of the costs, a reverse mortgage is best if you don’t
plan to sell your home within five years.
Caution: Many loans require repayment if the home is unoccupied for a year.
A reverse mortgage is a loan for senior citizens. It is often used to cover medical expenses, and is becoming
a common way for retired persons to supplement their existing monthly retirement income.
This is a loan that senior home owners may take against their current home. You don’t need to pay monthly
installment in this type of loan. Instead, the lender will pay for you. You will pay the loan back from your equity
when you’ve left the home either by selling it or passing away. Your children can keep your home by paying
the loan back with interest if they don’t want to sell it.
The concept of reverse mortgage is confusing to many and very often analogous with the conventional
mortgage but they are quite different from each other. A conventional mortgage is a falling-debt and rising-
equity transaction. But in the case of reverse mortgages, you will be given money by the lender and you will
not make payment. So, it will result in a rising-debt and falling-equity model. This is a perfect type of loan for
individuals desiring additional income for any number of reasons.
There are some factors you may consider in choosing a reverse mortgage. This type of loan is suited for you
if you need regular funds for living, you don’t want to leave your home to your children and your home is your
only asset. In order to qualify for the reverse mortgage, you may not need to have a minimum income.
Instead, you may not have income at all or may still owe money on conventional loans. The only requirement
is that you are a senior citizen and prepared to take this type of loan against your home. The eligible age may
differ from one place to another but in general the minimum age is 60. The joint owner must also sign for the
loan if the home is jointly owned.
The amount of money you can get from the reverse mortgage will depend on many factors such as your age,
value and amount of equity of your home, interest rates and closing cost on local home loans and other costs
of the loan. It also may differ from one lender to another.
You can receive the funds from your reverse mortgage in the form of one time payment, a line of credit, a fixed
monthly payment for a stipulated time, or a combination of the above. This will also differ from one lender to
another. You can obtain your reverse mortgage from both government and private companies. The
government loan is limited to a specific purpose like renovation, repairing and paying property taxes while the
private loan can be used for any purpose. The private mortgage is more costly than the government loan
because they incorporate various features like service taxes, insurance, and closing costs.
