Posted on: 19th Jun, 2005 12:36 am
If you're a senior, looking to cash out your home equity without having to worry about monthly payments, a reverse mortgage is what you may need. If you'd like to know how a reverse mortgage can help you, and what it's all about, check out the reverse mortgage information below:
- What is a reverse mortgage?
- How does a reverse mortgage work?
- Reverse Mortgage Costs
- When to pay back reverse mortgage
- What are the advantages of a reverse mortgage?
- Are there disadvantages of a reverse mortgage?
- Is Reverse Mortgage safe?
- How Reverse Mortgages differ from others
What is a reverse mortgage?
A Reverse mortgage (reverse equity mortgages) is a home loan that provides you with a steady flow of tax-free income either in installments or in lump sum. Since the loan provides an easy flow of cash, it is the preferred choice of many seniors in the country.
How does a reverse mortgage work?
It's just the reverse of a traditional mortgage which requires monthly payments. With a reverse mortgage, your debt accumulates as the bank doesn't collect the payments till the loan period ends or you or your heirs sell. Here are 5 things you should be aware of before you apply for a reverse equity mortgage:
- How to get the cash:
You can get the reverse mortgage loan funds in different ways.- The lender or the company can provide you with a single payment.
- You may ask for monthly cash advances.
- You can apply for a line-of-credit that gives you the opportunity to withdraw a required amount of cash whenever you are in need.
- The lender may allow for a combination of monthly cash advances as well as "credit-line account".
- Reverse mortgage limit:
The maximum loan amount offered ranges from $200,160 to $362,790, depending on the county you live in. However under the 2008 New Housing Bill, the loan limit has been raised to $417,000. For high cost housing areas, the limit is further raised to $625,000. However, the loan amount that you will qualify for, depends upon the factors given below:- Age of the youngest borrower
- The appraised value of your home
- The equity built up in your home
- What loan program you choose
- How you want to get the loan funds
- How to qualify for the loan:
Unlike other loan options, there is no minimum income or credit requirement to qualify for a reverse mortgage. However, if you have unpaid debt on your home, it should be paid off before you apply for a reverse mortgage or else paid off as soon as you get the loan proceeds. Check out if you are eligible for reverse mortgages. - Loan types you can apply for:
You'll find a variety of loan products available in the market. They're the FHA-insured Home equity conversion mortgage (HECM), the Home Keeper Mortgage offered by Fannie Mae approved lenders, and others. You need to compare these programs and decide on the one that suits you. Check out more on Reverse Mortgages Comparison. - Reverse mortgage interest rate:
These loans are mostly adjustable rate mortgages that adjust on a monthly, semi-annual, or annual basis. The interest rates are usually based on the 1 year U.S. Treasury (T-Bill) or the LIBOR index. However, you'll also find fixed rate HECMs offered by certain lenders. However, rate changes do not affect the principal you get; rather it affects the amount you owe.
What are the advantages of a reverse mortgage?
Reverse mortgages assisted countless homeowners improve their quality of life upon retirement. These are very flexible financial planning products with limited restrictions attached to them. Key benefits of this offer are listed below-
- No restrictions on the use of money: Money that you receive through a reverse mortgage can be utilized for whatever purposes you want. You can use it for funding the education of a family member, for traveling purposes, for meeting the basic necessities of life or for anything else. You can also park the amount in another account as savings for the rainy days.
- Less risks of default:In a reverse mortgage, there is no chance of losing your home for non-payment. Whereas, in case of a home equity loan, you may lose your home because of non-payment. Again, reverse mortgage lenders don’t have any claim on your other assets and income.
- Federally guaranteed:There are a variety of loan products available in the market. The most widely used reverse mortgage is the federally guaranteed home equity conversion mortgages (HECM). HECMs are managed by the Department of Housing and Urban Affairs. Since these offers are federally backed, you will continue to receive payments even if the reverse mortgage lenders default.
- Tax benefits:Reverse mortgage is treated as a loan. The money that you receive through this route is tax-free. This is regardless of whether you receive the money in monthly basis or in lump sum amount.
- Retains home ownership:As long as you stay in the house, you retain ownership of the house. However, you are responsible for paying for the property taxes, insurance and maintenance.
Are there disadvantages or dangers of reverse mortgages?
There are 3 reverse mortgage pitfalls to watch out for:
- Rising debt and falling equity:
A traditional mortgage requires you to make payments and build up equity. But reverse mortgages reduce your equity because you don't need to make monthly payments, and causes your mortgage debt ratio to increase. Your equity gets lower unless your home value appreciates. Thus, reverse mortgages are often known as "rising debt and falling equity" loans.
Here's an example on "Rising debt and falling equity".
Monthly Loan Amount: $2,000
Yearly Loan Advance: $24,000
Yearly Interest Rate: 8%
Original Home Value: $250,000
Appreciation Rate of Home Value: 5% per annumEnd of Year Principal Amount ($) Total Interest ($) Loan Amount ($) Total Home Value ($) Home Equity ($)
(Total Home Value - Loan Amount)1 24,000 1,052 25,052 262,500 237,448 2 48,000 4,102 52,102 275,625 223,523 3 72,000 9,224 81,224 289,406 208,182 4 96,000 16,495 112,495 303,876 191,381 5 120,000 25,990 145,990 319,070 173,080
As the above calculation shows, even if your home value goes up, it may not be enough to raise your home equity. The rate of appreciation in the home value should be high enough so that even if your loan balance increases, your home equity won't go down easily.
Now, when the appreciation isn't high enough, your equity will reduce, and as a result you may not have a home to leave for your heirs. This is because your heirs will only receive your home when the value of the home is more than what you owe. - Rates and closing costs:
The rates being adjustable can be higher at times thereby raising your interest and hence your debt because you aren't paying monthly. Some reverse mortgages have high closing costs, although under the new housing laws, the costs have been cut down and capped so that older homeowners can afford to get a reverse loan. - Eligibility for Medicaid benefits: The loan proceeds may affect your eligibility to receive Medicaid benefits and Supplemental Social Security income (SSI). However, you can still qualify for Medicare and Social Security Income.
Related Articles
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- Mobile home reverse mortgages for seniors
- Reverse mortgage - How it differs from traditional mortgages
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Related References:
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What is a reverse mortgage?
Hi atkinsted,
Taking a reverse mortgage will not end the social security that your father is receiving. No, he will not have to spend the whole money at once.
Taking a reverse mortgage will not end the social security that your father is receiving. No, he will not have to spend the whole money at once.
what if you want to sell your home and you can't find a buyer and you have a reverse mortgage on it?
Welcome peanut,
Your reverse mortgage will immediately become due if you sell off the property. You will have to decide whether you would be able to pay off the lender when you sell the property. Did you list the property in the market?
Your reverse mortgage will immediately become due if you sell off the property. You will have to decide whether you would be able to pay off the lender when you sell the property. Did you list the property in the market?
For example, if I am 62 and find a home with market value of $250,000 and the seller is asking $100,000, can I purchase the property with a reverse mortgage and receive the approx. $150,000? In other words, will you finance the $100,000 and give me a reverse mortgage for the $150,000 extra?
Hi rbingham!
Welcome to forums!
As far as I know, you'll be able to buy a property with the help of a reverse mortgage. However, this property has to be your primary residence. However, I don't think you'll be receiving $50,000 extra after purchasing the property for $100,000 with the help of a reverse mortgage.
Sussane
Welcome to forums!
As far as I know, you'll be able to buy a property with the help of a reverse mortgage. However, this property has to be your primary residence. However, I don't think you'll be receiving $50,000 extra after purchasing the property for $100,000 with the help of a reverse mortgage.
Sussane
my parents are in the process of going trough with reverse mortgage but were told they don't get any money from the deal, why is that?
loan amount @ 86,000 property appraised at $160,000
loan amount @ 86,000 property appraised at $160,000
Hi
Who told you that? Did you not ask him on what ground he told this? But, is there any outstanding loan on the property? If there is, then that has to be paid off first with the money from the reverse mortgage. Now if you have a large amount of loan due on the property, you will not be left with too much money after you get the reverse mortgage money and pay off the existing debt.
Who told you that? Did you not ask him on what ground he told this? But, is there any outstanding loan on the property? If there is, then that has to be paid off first with the money from the reverse mortgage. Now if you have a large amount of loan due on the property, you will not be left with too much money after you get the reverse mortgage money and pay off the existing debt.
I heard that I can take an equity loan out of my paid for townhouse and use it as a down payment on a new home. Is this true?
Hi Helen,
You can take out an equity loan and use it as a downpayment on a new house. But whether or not the lender would accept that, depends entirely on them. Some lender may prefer downpayments from other funds to that from a HELOC. Moreover, you should keep in mind that too much of debts will affect your DTI ratio and can spoil your chances of getting a new loan.
You can take out an equity loan and use it as a downpayment on a new house. But whether or not the lender would accept that, depends entirely on them. Some lender may prefer downpayments from other funds to that from a HELOC. Moreover, you should keep in mind that too much of debts will affect your DTI ratio and can spoil your chances of getting a new loan.
Hello all,
My mother lives in a mobile home where the floors are falling through. it is a 1983 model. She is 65 years old. She owns, clear title, the two acres that she lives on also. If we get another type of loan to get her a small house or a new trailer, could we say a month or two later get a reverse mortgage? Any stipulations on the time that she has to have lived in that new home?
My mother lives in a mobile home where the floors are falling through. it is a 1983 model. She is 65 years old. She owns, clear title, the two acres that she lives on also. If we get another type of loan to get her a small house or a new trailer, could we say a month or two later get a reverse mortgage? Any stipulations on the time that she has to have lived in that new home?
My parents had a reverse mortgage on thier home and had what I am told is MIP insurance. I have also been told that since there is the MIP insurance that the house should be ours free and clear. Is this true?
My husband and I are planning to retire and move to a retirement community in another state. With the present stock market situation, we have to postpone for at least a year until my social security kicks in.
We will be buying a house for cash. Is it possible to get a "temporary" reverse mortgage and pay it back within a couple of years?
We will be buying a house for cash. Is it possible to get a "temporary" reverse mortgage and pay it back within a couple of years?
Hi
To Sha,
Qualifying requirements for a reverse mortgage are far less strict than for a regular mortgage. I haven heard of any seasoning requirement for a reverse mortgage. If you are 62 tears old or more and hold the title free and clear to a property that has enough equity in it, you can obtain a reverse mortgage.
To Russ,
A Mortgage Insurance Premium (MIP) on a reverse mortgage makes sure that you never owe more than the value of the home, when the reverse mortgage is repaid. So, if your house increases in value over the years, there will be excess money left for you after the house is sold to pay off the reverse mortgage. If theres enough equity due to high appraisal, you can also get a new loan on the property and pay off the reverse mortgage.
To Bobbie,
A reverse mortgage for a very short term may not be available. But most of these reverse mortgages do not have a pre-payment penalty. So, if you can afford, you can pay off the mortgage after a few years, without having to pay any pre-payment penalty.
To Sha,
Qualifying requirements for a reverse mortgage are far less strict than for a regular mortgage. I haven heard of any seasoning requirement for a reverse mortgage. If you are 62 tears old or more and hold the title free and clear to a property that has enough equity in it, you can obtain a reverse mortgage.
To Russ,
A Mortgage Insurance Premium (MIP) on a reverse mortgage makes sure that you never owe more than the value of the home, when the reverse mortgage is repaid. So, if your house increases in value over the years, there will be excess money left for you after the house is sold to pay off the reverse mortgage. If theres enough equity due to high appraisal, you can also get a new loan on the property and pay off the reverse mortgage.
To Bobbie,
A reverse mortgage for a very short term may not be available. But most of these reverse mortgages do not have a pre-payment penalty. So, if you can afford, you can pay off the mortgage after a few years, without having to pay any pre-payment penalty.
we are desperate could anyone give us just one lead we have a double wide 1974 on 1 arce permanent foundation paid forwe need reverse mortgage please help if you can my friend will be 80 in july. We live in idaho thank you for your other replys
Hi Carol,
It will be very difficult to get a reverse mortgage on a 1974 mobile home. Such old homes do not qualify for any type of loans as they are not in compliance with the safety regulations and depreciate very fast. But still if you want, you can go for a no-obligation free mortgage consultation with the community lenders and see if the home can qualify for a reverse mortgage.
Thanks,
Jerry
It will be very difficult to get a reverse mortgage on a 1974 mobile home. Such old homes do not qualify for any type of loans as they are not in compliance with the safety regulations and depreciate very fast. But still if you want, you can go for a no-obligation free mortgage consultation with the community lenders and see if the home can qualify for a reverse mortgage.
Thanks,
Jerry