REVERSE MORTGAGE

Reverse mortgage is a mortgage loan program designed for seniors (62 and over). The reverse mortgage releases the home equity in the property either as one lump sum or in multiple payments. The homeowner's obligation to repay the loan is deferred until the owner lives, the home is sold, or the owner leaves the property (e.g., into aged care).

Unlike typical mortgage loans where the borrower makes monthly payments to repay the amount borrowed and after each payment the equity in the home increases, with the reverse mortgage, the borrower makes no payments to cover the loan, so the debt on the property grows with the amount borrowed plus the interest on the mortgage and the equity in the home decreases with each loan payment. During the life of the reverse mortgage the homeowner must pay property taxes and insurance on the home, other ways it may result in a default on the reverse mortgage.

The reverse mortgage loan ends when the homeowner passes away, sells the house, or moves out of the house for 12 consecutive months (depends on the loan terms). The reverse mortgage then can be paid off by selling or refinancing the house. In cases where these proceeds are not sufficient to repay the loan, then the bank or the insurance which the bank has on the loan take on the difference.

The common types of reverse mortgages are federally insured through the Department of Housing and Urban Development (HUD), Federal Housing Agency (FHA). The FHA reverse mortgages have lending limits that are set at the county level. Fannie Mae, a Government sponsored lending agency also offers reverse mortgages with a higher reverse mortgage limit. Several lenders and banks have their own reverse mortgage programs with a limit far above the maximum FHA 203(b) lending limit.

The reverse mortgage loan limit depends on:

1. The appraised value and the condition 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.
   
2. The interest rate, as determined by the U.S. Treasury 10 year T-Bill or the LIBOR index.
3. 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.
4. The form of the loan payment: 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.
5. The location of the property, and whether the maximum loan amount is subject to the maximum loan limits. 

The cost of getting a reverse mortgage is usually higher than the costs of other types of mortgages or equity loans. For the most popular reverse mortgage programs, the FHA-insured Home Equity Conversion Mortgage (HECM), there is an insurance premium of 2% of the loan and a 2% origination fee in addition to normal closing costs including appraisal fees, title searches, etc.

Reverse mortgages do not have fixed duration, therefore the reverse mortgage programs do not have fixed interest rates. Almost all reverse mortgage programs are Adjustable Rates Mortgages, adjusted on an annual, semi-annual, or monthly basis. Since there are no payments made during the course of the loan the interest accrued is then added to the principal of the loan.

1. Reverse Mortgage Benefits:
   1. The Reverse Mortgage helps seniors maintain financial independence and an adequate standard of living
   2. The Reverse Mortgage releases tax-free funds for as long as the senior home owner lives in the home
   3. With Reverse Mortgage the senior home owners do not have to repay the loan for as long as they live in the home
   4. The Reverse Mortgage does not require any income, medical or credit verification
   5. The senior home owner retains ownership of the home for life, or guaranteed for as long as the senior home owner maintains the home and pays insurance and property taxes
   6. With Reverse Mortgage the cash flow plan is tailored to the senior homeowner's needs
   7. The Reverse Mortgage does not set any restrictions on how the funds will be used

• Reverse Mortgage Warning:
  • Reverse Mortgages up front cost is higher than other types of loans
  • The senior homeowner might be spending his children's inheritance,
  • A Reverse Mortgage may affect seniors eligibility for certain "need based" public benefits
  • The numerous Reverse Mortgage options can be confusing

Reverse mortgage requirements:

1. The reverse mortgage borrower and co-borrower must be at least 62 years of age.
2. The reverse mortgage borrower must occupy the home as primary residence (where he/she lives a majority of the year).
3. The reverse mortgage borrower must own the home free and clear or have a low mortgage balance.
4. The borrower must attend pre-application reverse mortgage counseling before applying.

Before getting a Reverse Mortgage you should:

1. Analyze your financial needs to make sure a Reverse Mortgage is what you need. You may be able to achieve your financial goals with another, less costly loan or other financial solution than that provided by a Reverse Mortgage.
2. Meet a HUD approved Reverse Mortgage counselor free of charge. He will help you decide if a Reverse Mortgage is for you and choose among the different types of Reverse Mortgages.
3. Shop for a Reverse Mortgage and compare! Reverse Mortgages vary substantially in cost, loan limits, and different other features.
4. Reverse Mortgage might make you ineligible for public "need based" benefits you currently receive or may be eligible to receive in the future such as Medicaid or Supplemental Social Security Income (SSI). To be eligible for benefits the Reverse Mortgage payments have to be structured so that the monthly payments are spent within the month they are received. Other ways such payments are considered "income," and may make the senior ineligible for public benefits. You should contact your benefits provider to ask about how a Reverse Mortgage may affect your eligibility.