Reverse Mortgage

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Reverse Mortgages

I. Introduction
II. Reverse Mortgage Disadvantages
III. Find a Reverse Mortgage Counselor or Agency
IV. Apply for a Reverse Mortgage

Introduction

Are you a home owner over the age of 61? If so, a federally insured reverse mortgage might be a good way to supplement your fixed retirement income. A reverse mortgage is essentially a loan against the equity (the value of your home minus any debt it carries) in your home. In other words, it provides a way to turn the home you own into cash without selling or taking on monthly payments.

Unlike a conventional mortgage, a reverse mortgage loan must be repayed if you die, move out, or sell your home. There are no monthly payments to make, so there is no possibility of falling behind and losing your home. The proceeds from the sale of the home will always cover the amount owed with no additional out of pocket expense from you or your heirs. In fact, reverse mortgages are considered "nonrecourse" loans because the lender has no other recourse than to seek repayment through the sale of your home. The lender cannot garnish wages, place a lien on the automobile(s) of yours or your heirs, etc.

Are you eligible?

Reverse mortgages were really designed with retirees in mind. You and any co-owner of your home must be at least 62. If there is a debt against the home -- like a traditional mortgage, for example -- that leaves it with very little or no equity left, it must be payed before you can qualify for a reverse mortgage. However, if your home has a sufficient amount of equity, you may qualify to receive a cash advance from a reverse mortgage to pay off the outstanding debt.

You must also live in your home more than six months during each calender year, making it your "principal residence." Generally, if you live in a co-op apartment or trailer you will not qualify. Certain states require that a home be insured before an application can be accepted. Your income, other assets and credit history -- unless, of course, you have filed for bankruptcy -- does not affect your eligibility.

Federal law requires that you receive counseling by a HECM/HUD approved independent third party -- which is free -- to make sure that you, or any other applicant, understands the different options.

How large will the loan be?

Your age and any co-owners age, the location of your home, the value of your home, and the current interest rates will help determine the size of the loan. The older you are, the shorter life expectancy will be, which means fewer years for the loan value to increase. Therefore, the older you are the larger your loan will be. How the other factors determine the size of your loan depends upon with who you apply for a reverse mortgage with. Usually, this will be done with the backing Federal Housing Administration (FHA) -- which is part of the Housing and Urban Development Agency (HUD) -- or Fannie Mae, though other options are available.

Using the AARP's reverse mortgage calculator (http://www.rmaarp.com/), I was able to compare loan sizes between H.U.D.'s "Home Equity Conversion Mortgage" (HECM) and Fannie Mae's "Homekeeper" option for individuals age 65 and 75 in area code 94115. This will give you an idea of how much money someone eligible might receive from a reverse mortgage.

(Note: Calculations from November of 2005. These are estimates only and not an official loan disclosure.)

Age	YOU COULD GET	HECM	HomeKeeper
65	1) A single lump sum advance of	$100,389	$33,027
	2) OR a creditline account of	$100,389	$33,027
	the creditline grows larger each year by	6.54%	0%
	3) OR a monthly loan advance for as long as you live in your home	$610	$259
75	1) A single lump sum advance of	$121,300	$73,842
	2) OR a creditline account of	$121,300	$73,842
	the creditline grows larger each year by	6.54%	0%
	3) OR a monthly loan advance for as long as you live in your home	$822	$639

As you can see from the chart above, a reverse mortgage loan can be received in a number of ways. There are three non-taxable payment methods: You can opt to receive a lump-sum payment as a cash advance that will be payed on the first day of the loan. The option of receiving payments on a monthly basis for as long as you live in your home, or for a certain number of years is available. Also, a "flat" or "growing" creditline account can be set up (Note: creditlines are not available in Texas). A combination of the three payment methods can also be chosen.

No matter what payment method you choose, you will never owe more than the value of your home. Under certain circumstances, if you live for an unusually long time and the total amount you have received in payments is greater than the value of your home, you still will not owe more than the value of your home.

Now that we have covered some of the advantages of a reverse mortgage, let's focus on some of the disadvantages.

Next: Reverse Mortgage Disadvantages

Updated: Nov 2005