Reverse mortgage are becoming increasing popular mortgage option among a wide section of the public. It allows a household to use the equity which is built when the mortgage payments are made. The only difference is that here the payments are made to the household, hence the term ‘reverse mortgage’. There are no mortgage payments to be made from the senior homeowner. The program was designed specifically for seniors to utilize while in retirement. The program is very popular with some 100,000 seniors using this program to fund their retirement every year.
Most of the households go for Home Equity Conversion Mortgage (HECM) which is a FHA program. The reverse payment can be used in multiple ways. They are:
Tenure payment: Receive monthly payments till one of the owners is surviving.
Term payment: Receive fixed monthly payment for a given period.
Line of credit: Get a line of credit against the equity in the house. NO interest payments or principal repayments are required. This line of credit is made by using the house as collateral.
Mortgage repayment: Many households have a part of mortgage payments or liens against their home when a couple enters their retirement. Reverse mortgage can be used to eliminate this mortgage and to unlock any remaining equity in the house.
Lump sum payment: Lump sum payment can be obtained through reverse mortgage. You will receive a one-time payment equaled to 50% or more of the homes appraised value.
Combination of above: A household can choose a combination of the above payment methods. They can choose to have a line of credit for a fixed amount and have tenure payment for the remaining equity. They can also receive a small lump sum initially and have term payment for the remaining equity, or they can choose other alternatives.
Requirements to avail reverse mortgage:
Age: The age of the owner/owners should be above 62 years.
Value: The maximum value for which reverse mortgage can be availed is $625,000. If a house has a value beyond this, it will still be able to use only the given upper limit.
Primary residence: This should be a primary residence for the owners. They MUST stay in the house. The period when both the owners are not staying in the house cannot be more than one year.
Maintenance: Proper maintenance of the property must be done.
Taxes and insurance: Regular payment of taxes and insurance is required.
Home: HECM CAN be used for houses that are not purchased under FHA mortgage insurance program. Single unit houses or 2-4 units home can avail a reverse mortgage. For condominiums and manufactured homes they should be approved by HUD.
The amount that can be obtained through reverse mortgage depends on a couple of parameters. They are:
Interest rate: The prevailing interest rate is used to calculate the amount that can be disbursed to the household. The lower the interest rate, the higher is the amount available. Currently, the interest rates are rock bottom that makes it highly lucrative of any household to go for a reverse mortgage.
Age: While calculating reverse mortgage the age of the youngest borrower is used for calculation. The earlier a couple or an individual takes the reverse mortgage; the lower will be the net payments. Ideally one should wait till they are in their 70s to use this program unless there is an immediate financial requirement.
Value: The final amount depends on the appraised value of the property. In case the property has a value greater than $625,000, the reverse mortgage will use the value of home as $625,000.
Impact on Estate: The biggest worry for those looking for a reverse mortgage is about the impact of this program on their estate. The first thing is that there is NO EXCESS DEBT on the estate. If the disbursement to the household is in excess of the value of the house, there can be no transfer of debt to their estate. Similarly, if the disbursement is less than the value of the home at the demise of the owners the excess amount will be transferred to the estate. This transfer of remaining equity is the biggest advantage of the program. It provides requisite financial benefit without causing damage to the estate.
Another major advantage is that the money received from this program is considered as a loan advance and hence it not taxable and does not affect social security or Medicare benefits.
The senior population is expected to reach 65 million by 2025 from 34 million in 2000.
The rise in reverse mortgage loans is supposed to be commensurate with the rise in the senior population. Going forward the acceptance of this program in large numbers is predicted by government and private agencies.
However, any action regarding this should be done after due consultation with qualified professionals, detailed discussion with a spouse, friends and family and looking at the requirement of the household. An HECM professional can be contacted at (800) 569-4287 and requisite information can be free or at very low cost.
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