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Reverse Mortgage: Should You Use Your Home Equity To Get More Retirement Income?

Many Boomers today are facing an unpleasant future. Their golden years were supposed to be fun, relaxing and carefree, but now reality has set in, and they find themselves financially unprepared. Many didn’t save enough during their working years because they planned to sell their homes and live off the equity by moving to more affordable locales. The problem is that two-thirds of the average retiree’s net worth is in the form of home equity at a time when more are wanting to retire at home rather than selling and moving to Florida, Arizona or other warm climates.

Many may be tempted to explore the reverse mortgage option as a way to increase their retirement income. Doing so means the elimination of a mortgage payment, assuming payments are still being made, and the ability to receive a portion of your homes equity. Reverse mortgage recipients are then able to use the money for anything. Some may choose to blow it on a new car or motorhome, while others may wisely use it to supplement their income in retirement. Still, others may need it to pay for medical care or costly home repairs.

For divorcing couples, a reverse mortgage may allow one spouse to stay in the home while giving the other spouse funds to find a new home. A “for purchase” reverse mortgage option is also available for those interested in purchasing another retirement home. Essentially using the home equity to fund the purchase of a new home. Keep in mind that the loan will come due when the last surviving borrower either passes away, sells the home or leaves the home for more than 12 months due to illness.

How much you will be able to borrow with a reverse mortgage will depend on your age (or the age of the younger spouse), the value of your home and current mortgage rates. Assuming a five-percent interest rate, a 62-year-old borrower could potentially qualify for an initial payout of about 52% of the home’s value. This is capped by the Federal Housing Administration limit of $636,150.

There are sometimes substantial up-front costs to obtain a reverse mortgage so you will likely want to plan on staying in your home for several years to help offset those costs. If you don’t spend the money you’ve pulled out you can prepay the loan balance without penalty whenever you like. This sounds easier to do than it probably will be in reality. Few people take reverse mortgages who don’t need the money. If they wanted to pay back the full amount taken, without selling the property, most wouldn’t have the substantial assets needed to do it.

There are a variety of reverse mortgage payout options. Which one is best for you will depend on your financial needs and goals. During the first two years, you can borrow the maximum amount for which you have qualified. A line of credit will offer the most flexibility. You can tap into this on an as needed basis or keep it in reserve in case money is needed for expenses.

For borrowers who need income now, you can choose fixed monthly payments. This can be in tandem with an additional line of credit. There are three ways you can take these fixed reverse mortgage payments.

Reverse Mortgage Term Payment– provides a fixed monthly payment for a certain period of time. If you take the term payments, you will not receive any payments beyond the term. This could be a good option for older seniors who needed extra money for in home care.

Reverse Mortgage Tenure Payment- provides a fixed monthly payment. Amounts will be based on your age assuming a life expectancy of 100. Payments will remain in force until the borrower dies, sells or leaves the home for another reason. Payments will continue even if your loan balance grows beyond the total value of your home.

Modified Tenure Payment and Modified Term Payments- These types of reverse mortgages combine either payment type mentioned above with a line of credit. You will have the benefit of a guaranteed base income combined with the benefit of access to a growing line of credit.

Lump Sum Reverse Mortgage– When used properly, this can be the best option for some retirees. On the other hand, when used badly this can turn into a disaster. Because this is a one and done deal, if you take the lump sum and spend it, you are essentially out of options. You will be out of money. At that point, the only option would be to sell your home if you need further funds to live.

Only choose this option if you are comfortable handling large chunks of money, using it for specific large expenses (that you can afford) like long-term-care insurance, a needed home renovation or paying the taxes on a Roth IRA conversion. Taking the lump sum without a spending plan will not likely end well.

Terms Vary – Shop Around

Before pursuing a reverse mortgage, discuss it with your financial planner and tax professional. You’ll want to have a plan for how to use the money and how it will fit into your overall retirement plan. Make sure your financial planner is working as a fiduciary and not earning a commission for selling you the reverse mortgage. Put more plainly, you want to make sure you are getting unbiased advice.

A lender can help give you the basic information about what amounts you may qualify for with a reverse mortgage. Keep in mind that you may receive different terms, rates and amounts from different lenders.

Ideally, you’ll want to get at least three quotes. Make sure each proposed reverse mortgage shows a selection of margins and also illustrates how your choices affect the up-front cost and net payouts. The Federal Housing Administration (FHA) allows lenders to charge an origination fee equal to the greater of $2,500 or 2% of your home’s value (on the first $200,000 of value), plus one percent of the amount over $200,000, with a cap of $4,000 for homes valued between $200,000 and $400,000. The cap increases to $6,000 for home worth more than $400,000. Lenders are allowed to charge less, of course.

You will also likely be responsible for a range of other fees for third-party services.  These include services such as an appraisal, title search, insurance and inspection which can easily run another $2,500 or more. Costs will vary by location and value of property and you’ll be able to pay up-front costs from the loan proceeds or pay them out of pocket.

Generally, lenders charge a fixed interest rate on lump-sum payouts whereas most other types of payouts come with a variable interest rate. Typically, you will see rates tied to an underlying index such as the LIBOR plus a margin, which can often range from 2.5% to 4%. Most often the higher the margin the lower the original fee. You may also be able to negotiate a credit against the closing costs in return for a higher margin.

Loan officers are sometimes paid by the amount that you initially borrow. This could lead them to recommend taking more money sooner or pushing the lump sum option even when a tenure payment may be more beneficial to you. This is when the fiduciary financial planner comes in to help you pick the best option for your specific needs.

Your Responsibilities with a Reverse Mortgage

The terms of the reverse mortgage will require you to maintain the home. You will still be responsible for paying property taxes, which for many is a major portion of their “mortgage payment.” Homeowner’s insurance, homeowner’s dues or condo dues will still be your responsibility as well. Not complying with these requirements will mean you run the risk of defaulting on your reverse mortgage. If lenders assume you won’t be able to handle these costs, they will set aside funds from your payout, in an escrow account, to pay those bills on your behalf.

Having the reverse mortgage in the name of one spouse can cause some additional challenges down the road. Once the borrow leaves the home, due to death or another reason, the lender must ask an eligible non-borrowing spouse or committed partner to stay in the home. This can leave survivors in a financial crunch as they will need to continue to maintain the home and pay required expenses. But, they will no longer be able to take money out of the reverse mortgage.

The good news is you can’t owe more than the value of your home when it is sold to repay the reverse mortgage. Once you have passed, if your home sells for more than you owe, your heirs will be allowed to keep any leftover equity. If your heirs should want to purchase the home back from the reverse mortgage company when you pass, they can potentially refinance the reverse mortgage or repay the outstanding debt or 95% of the home’s appraised value, whichever is less.

What you need to know to get a Reverse Mortgage

There are eligibility requirements to obtain a reverse mortgage. Borrowers must be at least 62 years old, be named on the title of the home and reside there at least half the year. Your qualified payout amount will depend on your age, as well as the current interest rates and the appraised value of your home. Currently, the maximum payout is $636,150 but some lenders will offer larger “jumbo” reverse mortgages. Generally, the younger you are, the lower the payout will be relative to your home’s value.

You must also receive financial counseling to ensure that you can meet your obligations as a reverse mortgage borrower. To find a housing counselor certified by the Department of Housing and Urban Development (HUD) call 800-569-4289.  Sessions will normally run $125 to $250 and can be done in person or over the phone.

If you still have a mortgage, you will need to pay it off from the reverse mortgage loan or other sources. You won’t be allowed to withdraw more than 60% of your principal limit in the first year. The only exception to this is if you needed more to pay off existing mortgage debt or make repairs that are being required by the reverse mortgage lender. Reverse mortgages are insured by the FHA, and at closing, you will have to pay an initial FHA mortgage insurance premium equal to 0.5% of the appraised value of the home assuming you take less than 60% of the value in the first year. Keep in mind that insurance premiums jump to 2.5% if you take more than that 60% number.

While no principal or interest payments will be due while you are still alive and living in the home, you will be accruing annual mortgage premiums at a rate of 1.25% per year. This is based on the amount you borrow and interest charges will accrue on any outstanding balance. You may think these things do not matter but, if you talk to anyone who has tried to get out of their reverse mortgage, all the little details are extremely important.

Reverse mortgages are sometimes marketed as a solution to all of a senior’s money problems. They may also sound like a way to more fully enjoy retirement. However, they can be complicated and hard to understand. The fees and interest can eat up a substantial portion of a homeowner’s equity. For many older adults, there are better solutions to financial struggles.

A real estate attorney that I know, who shall remain nameless, stated “99% of people who think they want a reverse mortgage shouldn’t get one. It’s a very rare occasion when these are right for the person.” With that in mind, think long and hard before signing on the dotted line. Explore your other potential options and make an informed decision.

By David Rae, Forbes

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Reverse Mortgage Securities Total $7.1 Billion in 2013 to Date

Issuance of reverse mortgage securities

$7.1 billion was totaled for the first three quarters of 2013, so with 757 pools issued, according to mortgage information by New View Advisors. For the first nine months of 2013, there are now 11 active issuers of reverse mortgage securities, New View notes, with American Advisors Group (AAG) as the newest entrant.

Issuing 14 pools for nearly $288 million,

American Advisors Group represents 4.05% of total reverse mortgage securities issuance. AAG is currently No. 6 for dollar volume in the nine-month rankings compiled by New View.

RMS continues to reign as the No. 1 issuer, with a total of 179 pools for $2.3 billion issued year to date.

The company issued 57 pools for $589.7 million in the third quarter, raising its lead over No. 2 issuer Urban Financial, so Urban sold 44 pools for $495.2 million in the third quarter.

As of the third quarter of 2013, RMS accounts for 32.74% of all issuance and Urban represents 25.53%, respectively.

Live Well Financial, Generation Mortgage and Nationstar held their positions. As they were number three, four and five issuers, representing 13.80%, 9.64% and 6.23%.

While the number of reverse mortgage securities pools issued in the third quarter was nearly identical to the previous quarter, 257 compared to 256, dollar volume declined 13% to $2.2 billion.

This causes lower origination volume. The increase of smaller “tail” issuance occurring as servicing, and borrower draws and MIP. So, Home Equity Conversion Mortgages (HECMs), notes New View. So, “Despite the downward origination trend, ongoing tail issuance, negative amortization and existing new issuance continues to outweigh payoffs,” said Michael McCully, partner with New View. “This has a positive impact on liquidity in the sector.”

Of the third quarter issuance, $950 million, or 43%, was fixed rate. So, year to date, fixed rate reverse mortgage securities represent approximately 60%, or $4.2 billion, of total issuance.

In the first half of 2013, the figure was $3.3 billion, representing 67% of total issuance.

By Jason Oliva

February 13th, 2016.


 

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Retirement Just Got Harder: The FHA Sets New Limits on Reverse Mortgages

Reverse mortgage retirement is something everyone should be able to understand, including the new FHA limits on them.

Bad news for seniors:

Reverse mortgages just got much less attractive. Starting Sept. 30, new regulations will make it more difficult and more expensive to take advantage of the government’s reverse-mortgage program.

What is a reverse mortgage?

The concept is fairly self-explanatory. With a mortgage, you make monthly payments to a lender. So, with a reverse mortgage, you receive payments from a lender. The loan doesn’t have to be repaid until you die, sell the house, or establish another primary residence.

Reverse mortgages are available to people 62 or older. The money can be used as retirement income, to pay for medical bills, for home improvements, or even to pay off your current mortgage. You are converting part of your home equity into cash. As with any loan, you will pay interest on the amount borrowed.

New limitations

After two years with rates at historic lows, the Federal Housing Administration is attempting to mitigate insurance losses by imposing new restrictions on federally insured reverse mortgages.

Here are the changes taking effect this fall for reverse mortgage retirement:

  • First-year limit. A homeowner may now withdraw only up to 60% of the eligible sum during the first year. If, for example, a person receives a reverse mortgage of $300,000, only a withdrawal of $180,000 is possible in year one.
  • Smaller loans. Before the new rules, borrowers could take out as much as 61.9% of their home’s value — the limit depended on your age, your home value, and the interest rate. That same evaluation applies, but on average, borrowers will be able to take out about 15% less than they used to.
  • Fee changes. Previously, the upfront fee to take out a standard reverse mortgage was 2% of the property’s value. The upfront fee to take out a saver reverse mortgage — which limits you to a smaller amount you can borrow against your equity — was 0.01%. Now, the upfront fee will be 0.5% across the board. Folks who take out more than 60% of their home’s value will pay a 2.5% insurance premium.
  • Financial assessment. Lenders will now be required to analyze their borrowers’ ability to keep up with tax and insurance payments before issuing a reverse mortgage. So, lenders will look at income sources and credit history to determine the borrower’s creditworthiness. If a lender decides you may not be able to make your payments, you will be required to set aside money.

The changes are intended to make people more careful about how they fund their retirement.

So, the FHA wants borrowers to take out only what they need and what they can afford. The program strives to be less a safety net for financial emergencies and more a longer-term financial-planning tool. Of course, these changes present additional challenges to the already expensive process of retirement.

By Mike Anderson, NerdWallet, and The Motley Fool

February 10th, 2014. Reverse mortgage retirement

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5 Reverse Mortgage Tips

If you would like to be informed about reverse mortgage tips, this is the article for you.

If you’re in your 60s and own your home, chances are you’ve heard about reverse mortgages—or will soon. Reverse mortgages allow you to tap the equity in your home. But they have risks and can be costly. Here are five reverse mortgage tips to consider:

1. Weigh all your options.

Whether you need money to pay bills or just want some extra cash, a reverse mortgage should be a last resort. Other options include selling your house and downsizing, or renting while carefully investing the sale proceeds. You could also take out a home equity loan or line of credit. If credit cards are the problem, consider consolidating that debt. If paying real estate taxes or home maintenance costs are the problem, look into local government assistance programs that can help. But, you have many options. So ask your state agency on aging about less risky, lower-cost ways to address your needs.

2. Understand the risks, costs and fees.

Even though you won’t be making any interest payments as long as you live in your home, the interest rate matters. If you decide to move, you’ll have to pay back the reverse mortgage plus compounded interest. The same is true if you have to leave your home for more than 12 months. Ask about all costs and fees, including any prepayment penalties.

3. Recognize the full impact of your decision.

While you typically don’t have to pay taxes on the proceeds of a reverse mortgage, the income or lump sum you receive could affect your eligibility—or your spouse’s eligibility—for various state and federal benefits, including Medicaid. Depending on the state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home that you can only pay for by liquidating assets. Finally, consider that a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.

4. Get independent advice about reverse mortgage tips.

Reverse mortgages are such complicated transactions. The federal government requires borrowers to meet with HUD-approved counselors before getting a federally guaranteed loan. Confirm that any counselor recommended by your lender is truly independent. You can do this by asking whether he or she receives any funding from the lender or the mortgage industry.

While most loans are federally guaranteed, lenders also offer proprietary loans that are not. Even if you’re applying for a proprietary loan, it’s a good idea to get advice from a trusted financial adviser who has no interest in either the reverse mortgage or any investment you plan to make with the proceeds. In any event, before you agree to a reverse mortgage, consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who aren’t connected in any other way to the transaction or the lender.

5. Be skeptical of reverse mortgages as part of an investment strategy.

Be very skeptical if someone urges you to get a reverse mortgage to make an investment or purchase an insurance product or a security—particularly if they are promising high returns. In essence, they’re encouraging you to speculate with your home equity. You may need for more critical purposes down the road. If you can’t afford to get a low return or the loss of your home, you shouldn’t be investing with your home equity funds.

By Gerri Walsh

February 10th, 2014.

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How To Do a Reverse Mortgages

Reverse mortgages were originally designed so that seniors who own their homes or have considerable equity in their homes can free up cash for living expenses without selling their homes.

 

To qualify for a reverse mortgage, you must:

-Occupy the home as a principal residence for more than six months of the year.

-Be at least 62 years old.

-Pay off any debt against the home before obtaining the reverse mortgage. Or, use an immediate cash advance from the reverse mortgage to pay it off.

The amount that can be borrowed is based on your age, the equity in the home and the interest rate charged by the lender. You will retain title to your home and be responsible for taxes, repairs and maintenance. If you do not fulfill these responsibilities, the loan could become due and payable in full. The loan becomes due with interest when you sell your home, move, die or reach the end of the loan term.

There are three types of reverse mortgages:

-FHA-Insured

-Lender Insured

-Uninsured

With all three, interest on the loan amount adds to the principal balance each month. There will also be loan origination fees and closing costs with each. The loan is not taxable. When the loan term expires, you will either need to pay back the loan or sell your home and move.

Before you can close on a reverse mortgage you will be required to take counseling at the local office of the US Department of Housing and Urban Development (HUD) or a HUD approved housing counseling agency. This is a free service of HUD and it will give you a good education regarding the various types of reverse mortgages and whether a reverse mortgage is right for you.

A reverse mortgage can be a good choice but they are not right for everyone. You may wish to consult with your attorney and/or financial adviser to see if it makes sense for you.

By Dale Athanas

January 27th, 2014.

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2013- The Biggest Reverse Mortgage News Stories

1. FHA to Halt Fixed Rate Standard Reverse Mortgage Starting April 1on Jan. 30, 2013. So, the FHA said it would merge the Saver and Standard loan programs. This would eliminate the popular fixed-rate, standard reverse mortgage

Here are the top 10 most-read stories on RMD this year, according to traffic data compiled by our editorial team.

2. HUD Announces Major Changes to Reverse Mortgage Program on Sept. 3, 2013. The HUD spelled changes to the HECM program including new borrower requirements. This took effect on October 1, the same year.

3. HUD to Combine Existing Reverse Mortgage Products on Aug. 19, 2013. Prior to making reverse mortgage changes, HUD informed the industry it was considering them, following an actuarial review of FHA’s insurance fund that showed reverse mortgage loans led to an FHA shortfall in fiscal year 2012.

4. HUD Slashes Reverse Mortgage Principal Limit Factors on Sept. 4, 2013. Following the announcement of changes to the HECM program, HUD announced new reverse mortgage principal limit factors that went into effect October 1. New borrowers see about 15% less in proceeds as a result.

5. FHA Reverse Mortgage Changes Coming By Month’s End and FHA: New Reverse Mortgage Changes Coming in August—Jan 15 and July 31, 2013, lenders then tuned in to FHA’s announcements of upcoming changes throughout the year.

(From product changes to mergers and new business entrants, the reverse mortgage market has seen a wealth of news in 2013)

6. [Update] Walter Investment Management Buys Security One for Up to $31 Million on Jan. 2, 2013. Walter, which previously acquired RMS, purchased Security One in the first part of 2013, which ramped up its position in the market.

7. Former MetLife Execs Launch New Reverse Mortgage Start-Up on Feb. 24, 2013. Several former MetLife reverse mortgage executives announced a new startup, Reverse Mortgage Funding, that then later opened for business in August.

8. Nationstar Acquires Greenlight Financial for Up to $75 Million on May 7, 2013. Mortgage servicing giant Nationstar agreed to acquire Greenlight Financial as well as its reverse mortgage platform, for up to $75 million.

9. President Obama Signs Reverse Mortgage Reform Bill into Law on Aug. 9, 2013. President Obama signed into law the Reverse Mortgage Stabilization Act, authorizing the Secretary of HUD to establish additional requirements to improve the fiscal safety and soundness of the HECM program.

10. Court Rules Against HUD in Reverse Mortgage Non-Borrowing Spouse Suit—Oct. 1, 2013—In a lawsuit that has yet to be resolved, a court ruled against HUD in a suit filed by non-borrowing spouses of reverse mortgage borrowers. HUD has since appealed the ruling.

By Elizabeth Ecker

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Wife doesn’t need to fear a Reverse Mortgage

Reverse Mortgage

Let’s figure it out.

Question:

Dear Retirement Adviser,
Our home has had a reverse mortgage since 2008 when my husband turned 62 years old. We are retired and I’m now 62. I feel like I need to be added to the deed.

The mortgage lender says that it is not possible because they do not initiate these anymore and that we should refinance with another company. We talked with one company and were told it is not possible because our current interest rate is too low. Also, we would need to come up with an extra $15,000 at closing. We are both disabled and live on our Social Security checks. We have trouble paying the electricity bill.

It appears that if my husband dies I could become homeless. We are worried and don’t know what to do. Can you help?

Thank you,
— Maria Mortgage

Answer:

Dear Maria,
Your situation highlights a common problem with reverse mortgages, particularly for retired couples. At the time your husband got his reverse mortgage, the youngest person on the mortgage had to be at least 62.

It’s also timely because a federal court has recently ruled that a surviving spouse can’t be evicted from the home when there’s a reverse mortgage in place. That’s even if they are not listed on the mortgage.

AARP Foundation attorneys, acting for two surviving spouses, sued the Department of Housing and Urban Development over the issue. HUD regulates reverse mortgage loans. AARP held that HUD was in violation of federal law when it required surviving spouses not named on the reverse mortgage loan to either pay off the loan or face foreclosure when their spouse died.

So, you don’t need to refinance your reverse mortgage to protect your ability to live in the home, should your husband die first.

HUD is expected to release information in the near future that will spell out the implications of this court case. I hate to tell a person struggling to pay the electric bill that he or she should consult with a real estate attorney on the matter. But if you did, it could give you some peace of mind. It also would be a lot cheaper than getting a new reverse mortgage at a higher interest rate and paying $15,000 to close.

These regulations were revised in 2013 under the Reverse Mortgage Stabilization Act. Newer reverse mortgage loans issued since the law was implemented will include the spouse on the loan, thus formally protecting surviving spouses. Unfortunately, the changes are also expected to reduce the amount of money available to seniors from a reverse mortgage.

By Dr. Don Taylor, Ph.D., CFA, CFP, CASL

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Reverse mortgage strategy can open door to second home

A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.

A reverse mortgage is against a primary residence, yet the loan also works to help purchase a second home.

While the proceeds of a reverse mortgage typically help seniors to “age in place” by making their home more comfortable for their retirement years, there are no limitations on how reverse funds can be used.

One family sought to lower their monthly mortgage payment on their primary home so that they could afford the monthly payments on a recreational cabin. Instead of cashing other assets, paying the capital gain tax and plunking down the net amount as the cabin’s down payment, the couple took out a reverse mortgage, which accomplished the same goal.

“They wanted to keep their home but were concerned that their monthly obligations would prohibit them from qualifying for another mortgage on a second home,” said John Harding of Axia Home Loans Reverse Mortgage Division. “By refinancing their home with a reverse mortgage, it not only eliminated their mortgage payment but also provided the down payment funds for the cabin. Since there was no longer any monthly payment, it was easier for them to qualify for a mortgage on the cabin.”

Let’s take a look at the numbers:

Primary residence
Value: $600,000

Mortgage: $281,000

Mortgage payment: $2,114 (plus taxes and insurance)

Reverse Mortgage: $433,800

Net proceeds after paying off mortgage plus closing costs: $128,311

Cabin
Purchase price: $215,000

Down payment: $70,000

Funds needed to close: $77,000

Conventional loan: $145,000

Mortgage payment: $811 a month (plus taxes and insurance)

The strategy

The strategy will enable the Casey’s to live in  their home with no mortgage payments for the rest of their lives, or until they sell the house. It also reduces their monthly mortgage obligations from $2,114 to $811.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home. They can do so without having to sell the home, give up title or take on new monthly mortgage payments. One uses loan proceeds for any purpose, they take out as a lump sum, pay fixed monthly payments, establish a line of credit, or have a combination of those options.

The “expected interest rate” is a critical factor that determines how much equity an elderly homeowner is eligible to receive from a HECM.

Add a margin to the 10-year U.S. Constant Maturity Treasury rate to calculate it, which is published weekly by the Federal Reserve.

The reverse mortgage loan amount depends on the borrower’s age, current interest rates. In most cases, so does the location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home.

Seniors can “outlive” the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage. Even if the principal balance grows to exceed the value of the property, this is so. If the value of the house is exceeding what is owed at the time of homeowner’s death, the rest goes to the estate.

A controversial topic has been the “trailing spouse” issue.

If the surviving spouse is not included on the reverse note, the surviving non-borrower spouse may not be able to pay off the loan balance or qualify for a HECM on their own to remain in the property.

The situation usually occurs when an older man marries a younger woman. The woman then chooses not to go on the reverse mortgage title. Since the age of the younger spouse dictates potential proceeds, her participation decreases the net amount.

Recently, HUD’s Office of Housing Counseling sent a notice to all HECM-approved counselors. This encourages them to take special precautionary measures when meeting with non-borrower spouses. So, they fully understand the future repercussions of not being on title to the HECM loan. The notice also recommended that counselors get a signed, individual written statement from a non-borrower spouse. This must acknowledging that he or she may have to leave the property upon the death of the borrower.

This reality is additionally important when a second home is involved. A reverse mortgage can be terrific, but if your name isn’t on the mortgage note, at least have somewhere to stay.

By Tom Kelly

November 30, 2013

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Retiring on the House: Reverse Mortgages for Baby Boomers

As baby boomers age, reverse mortgages expect to gain popularity as a means of covering living expenses. Hence, in the future, more homes passed on to children will come with a bill attached. (The balance due on these equity loans).

Federally insured reverse mortgages, officially issued as part of the Home Equity Conversion Mortgage program, are a way for homeowners 62 and older to borrow money using their home equity as collateral. One must pay the remaining proceeds balance on the mortgage, which frees homeowners from monthly payments. Interest and monthly insurance premiums are charged throughout the life of the loan. The total becomes due when the borrower dies (or permanently moves out of the home).

“A common misconception about reverse mortgages is that the lender takes an equity share in the house”. (Vivian Dye, a reverse-mortgage consultant at Atlantic Residential Mortgage in Westport, Conn). “It’s a relationship between the bank and the borrower,” she said, “and it’s the same kind of relationship as a regular loan.”

As the first lien holder on the property title, however, the lender must be repaid when the property changes hands. How the heirs handle repayment depends on how much equity is left in the home and whether they want to keep it.

Under federal regulations, after the last borrower named on the loan has died, the lender must provide up to 30 days for the heirs to decide on a repayment method.

“Heirs then have up to six months to sell or arrange financing”, said (Colin Cushman, the chief executive of Generation Mortgage). She is a reverse-mortgage originator and servicer based in Atlanta. But, he notes, as many as two 90-day extensions are allows the heirs to show they are actively trying to sell the property.

Should they wish to retain ownership, the heirs might choose to get a separate mortgage to refinance the home and pay off the reverse mortgage. Or, if there is enough equity in the home, they might choose to sell it and use the proceeds to pay off the loan.

The heirs will not be on the hook for any shortfall should the home fail to sell for enough to pay the loan in full. If the loan balance is exceeding the value of the home, the amount owed is limited to 95 percent of the appraised value.

Mr. Cushman offered an example: On a home with an appraised value of $100,000, a reverse mortgage balance of $120,000. In addition, the amount owed the lender would be $95,000. (No short sale approves for less than that amount.) Government-backed insurance on the loan would cover the $25,000 gap.

In such “underwater” situations, the heirs may instead choose a deed in lieu of foreclosure. In this case, they simply deed the property over to the lender.

Heirs should be aware that the ability to draw on the reverse mortgage ceases once the borrower dies. For that reason, Ms. Dye recommends that the family considers whether enough money is set aside for things like funeral expenses while funds are still accessible — that is, if the family discusses finances at all.

“Some people don’t even know their parents had a reverse mortgage,” said Vincent Liberti. (Estate planning and elder law lawyer in Hartford).

He frequently sees financially precarious people who haven’t planned for retirement take on a reverse mortgage as a last resort. This is in addition to those who go through the funds too quickly. It’s one of the last “tools” he recommends using.

But Mr. Cushman says his firm is trying to change such negative perceptions. With an app planning tool, “nu62,” it is shown how to use home equity strategically to meet long-term financial goals.

February 18th, 2014

By Lisa Prevost

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