Reverse Mortgage Loan Blog

With the cost of living and life expectancy continuing to rise, senior citizens are facing a double whammy.

Add to that high insurance costs, medical expenses and mortgage payments, some retired individuals are struggling to keep their heads above water without a steady income coming in any more.

Looking for a revenue stream, some elderly homeowners are turning to reverse mortgages.

Reverse mortgages allow qualified borrowers to tap the equity in their home, pay off their existing mortgage balance and remain in their home for as long as they can.

The Home Equity Conversion Mortgage [HECM], the Federal Housing Authority’s reverse mortgage program [FHA), allows homeowners to convert part of your equity into cash.]

To be eligible, you must be at least 62 years old, live in the home and own it or have a low mortgage balance that can be paid off with the proceeds of the reverse loan when closing, according to the HUD web site.

“You can access a portion of the equity in your home without ever having to make monthly mortgage payments,” explains Kenneth Klawans, president of iReverse Home Loans. “This causes the loan balance to increase, whereas in a ‘forward’ mortgage, the payments you are making will decrease the balance of the loan.”

If the homeowner moves out or passes away, the owner or the heirs must decide what to do with the property: sell it or keep the home and possibly refinance it to pay off the remaining balance of the reverse mortgage.

“With a reverse mortgage, the money is paid back to the lender when the last remaining borrower permanently moves out of the property,” says Klawans.

The portion of equity from a reverse mortgage depends on age, the appraised value of the home, fees, and interest rates. Using a calculator can help you figure out what you can borrow.

Payment Options

Reverse mortgages have several payment options. According to Carolyn Warren, author of Homebuyers Beware:  Who’s Ripping You Off Now?, the most common choices include:

• Receiving a lump sum of cash at a fixed rate;

• Receiving monthly payments at an adjustable rate;

• Receiving a combination of the two: getting a smaller lump sum with monthly payments at an adjustable rate.

Factors to Consider

As with any financial decision, you should shop around different lenders. Just like with conventional mortgages, lenders can charge different rates and fees for their services.

“I highly recommend speaking with several reverse mortgage lenders and/or brokers,” says Klawans. “While cost should be one consideration in choosing who you work with, you must also feel comfortable with the knowledge and abilities of the loan representative.”

Plan ahead with your future financial situation to determine whether you want a fixed or adjustable rate loan. Depending upon the bank, some lenders have provided some incentive for fixed rates.

“Just recently in the last six months or so, banks have been absorbing some of the fees,” says Ed O’Conner, president of Advance Funding Solutions. “They’re taking some closing costs on what are typically the fixed rate products. It does vary from bank to bank, but you can cut your closing costs in half if the fixed rate is the right option [for a person].”

Since the housing market took a hit in the last two years, interest in reverse mortgages slowed dramatically and lenders are looking to attract customers.

“There are some seriously reduced fees: there’s no origination fee most times, no monthly servicing fee, and sometimes there’s no upfront insurance on the fixed rate,” says Brian Brown, mortgage manager at Lenox Financial Mortgage.  “If seniors are considering the program, they need to move on it simply because the HUD is probably going to be decreasing the principle limit by anywhere from 5 to 20% by September or October this year [2010].”

Reverse mortgages do not normally impact Medicare or Social Security benefits. However, if you have Medicaid, Brown suggests that you contact your provider and ask them specifically if your benefits can be affected.

Mandatory counseling is a part of the reverse mortgage program, which can clear up any confusion and provides people with a reliable, unbiased source of information.

“Reverse mortgages are kind of a complicated process,” says Richard Schram, community outreach and special projects manager of CredAbility. “The agency, being separate and apart from the lenders, certainly provides a different perspective to the borrower and lets them understand what the process is and what it is that a reverse mortgage is.”

Benefits of the Program

Reverse mortgage payments can be a real financial boost, especially if you don’t have a steady income or rely on Social Security benefits.

“It’s tax free money–there are no restrictions on what they can and can’t do with it,” says Brown. “[It] is a great way for someone to access the money that they’ve paid already.”

As a typical example, if you or a loved one is getting older and wants to stay at home with a hired nurse, instead of moving to an assisted-living facility or nursing home, a reverse mortgage can generate money to cover in-home expenses.

If you are planning on selling the home in the future, the payments can help cover renovations to make the home more appealing to potential buyers.

A reverse mortgage can ease some apprehensions about losing the home, because as Warren points out, you cannot lose your home even if you outlive the equity.

“The great thing is that you can never owe more than your home is worth,” says Lyons. “Nobody is ever going to be left with an outstanding bill.”

Potential Pitfalls

If you are not planning to live in your home for the long haul, a reverse mortgage might not be the best option, the experts warn.

“It does not make sense to get a reverse mortgage if you’re only going to stay in your house for two or three years,” says Warren. “It makes it not worth it because the fees are too high.”

If keeping your home within your family is important to you, a reverse mortgage is not the way to go.

“If you’re someone who really feels strongly about leaving your house to your heirs, then a reverse mortgage might not be the right route for you unless [your heirs] have some other way of paying off the loan,” says Sarah Lyons, co-author of ReverseMortgages for Dummies.

Because the loan needs to be repaid when you move out of the house or when you die, the most common way of paying off the loan is to sell the house.

“In some instances, there are family considerations in that there are some individuals who believe that when mom and dad have their house, it automatically should come to them,” says Schram. “If something happens to mom and dad, the property doesn’t just automatically pass on to their heirs; it is subject to the mortgage or if they decide to sell the property.”

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