Reverse Mortgages

Proceed with caution when shopping for reverse annuity mortgages

Reverse loans, or reverse annuity mortgages (RAMs) are becoming a topic of conversation in many families as older parents and adult children come to grips with questions of long term care, housing, and increasing medical cost. Reverse mortgages are, as the name implies, the opposite of a standard mortgage. Instead of making payments to the mortgage holder, the mortgage holder makes payments to you.

What are the advantages?

A reverse mortgage allows you money to supplement a fixed income by tapping the equity in your home. You still retain ownership and control of our home with all the pleasures and work that entails.

The money can be taken in a single lump sum payment, monthly payments, or some combination to the homeowner.

The payments are tax-free and may be used for anything you wish. They also don't affect Social Security or Medicare benefits.

Whether the loan is advanced to you incrementally or at one time, you can not borrow more than your home is worth. You owe on the accumulated advances and interest, but the lender can not come after you or your heirs for repayment if the housing market unexpectedly deflates and loses value.

Repayment is not required until such a time as the surviving borrower dies or sells the home. If your parents, for example, decide to sell and move into assisted living, and you sell the home, then repayment is required at that time.

Disadvantages?

The cost of a a reverse mortgage can be high depending on the terms, finance charges, and duration of the loan. Before taking any loan, do your homework and check out various loan programs to see how much cash is available relative to the loan costs and finance fees. There are a range of reverse loans available, so run your numbers against several of them to see what the real advantages and disadvantages are in your particular case. Don't forget to consider the costs of "worst case" scenarios, too.

Just as with a regular mortgage, you can roll the finance fees and closing costs into the loan costs. These costs can be fairly steep, sometimes 5-6% of your home's value. If the term of the loan is short, the effective loan rate can be very high. This money is paid up front, so if circumstances change abruptly shortly after the loan is issued, then you're out the money in any case. In addition to origination fees, finance fees, and closing costs, the lender may set and charge servicing fees.

Interest is not deductible on your taxes. Interest is accrued over the course of the loan, but can be taken only when the loan is paid off.

Reverse mortgages must be the primary mortgage on the home. This necessitates paying off any existing debt or lien against the property before a new mortgage can be issued. A lump sum can be issued to the owner to pay off the existing mortgage. (Government loans can sometimes be obtained which don't require paying off a previous mortgage.)

Conditions of default can also cause problems if you aren't aware of them. Failure to pay property taxes or to maintain the home, for example, can result in a demand by the lender for immediate repayment. An argument can be made that forgetting to pay taxes is an indication that assisted living is probably more practical that maintaining a home, but it nevertheless puts additional strain on family relationships as anyone who has had to relieve one of their parents of the car keys can tell you. Be very clear about the conditions of default and terms of repayment before taking out the loan.

A reverse mortgage can use up all the equity in your home between the accrued payments and interest that is added over the life of the loan. This can leave few assets for your heirs. It's something to consider if you dreamed of leaving enough for your grandchildren to get college educations.

Types of reverse mortgages

As has been noted there are different types of reverse mortgages. According to the US Federal Trade Commission, there are three basic types: a single-purpose reverse mortgage offered by some state and local government agencies or non profits; federally insured mortgages backed by HUD; and proprietary mortgages offered by mortgage companies.

The most popular is second type: the federally-insured Home Equity Conversion Mortgage (HECM), which is is available through the Federal Housing Administration (FHA). Though the loan amount is tied to the borrower's age, appraised home value, and current interest rates, the amount of money available is capped at a maximum limit set for the county. Also required is a mortgage insurance premium of 2% of the loan up front with additional premiums of .5% to be paid annually thereafter.

Fannie Mae offers an alternative to the HECM. Called Home Keeper®, the Fannie Mae loan is available to homeowners with higher property values as well as condo owners. It also permits seniors to purchase a new home with a reverse mortgage. The amount of money available depends on the age and number of borrowers, home value, and current interest rates. The maximum loan limit is higher than the more conservative FHA limit.

Higher loan amounts are available under the Financial Freedom Senior Funding Corporation loans. The cash account product is designed for higher priced homes and unusual property situations excluded by the FHA or Fannie Mae programs. Borrowers take 100% of their available benefit when the loan closes. Homeowners must be 62 or older and have the ability to convert their equity to cash without having to sell or assume monthly payments.

Single-purpose reverse mortgages have low up front costs but are restricted in purpose and in who can use them. Offered most often by non profits and local governments, these mortgages are usually focused on low-income borrowers who need to make essential home repairs.

Before the reverse mortgage

Before signing up for a reverse mortgage, especially if your family is a little lean on resources, check with public benefits programs for which you or your parents might qualify. Though programs are being cut in all directions, many support services are still available to qualified individuals. If you've worked for fifty years and paid taxes, you might be surprised to find that some programs will cover health care or prescriptions, and may be designed for your circumstances. Some programs can help seniors find home improvement help that allows them to remain in their homes longer. Even a little bit of extra help can go a long way and allow you to postpone acquiring a reverse mortgage until later should it become necessary.

Resources


For help finding qualified, professional home improvement contractors, check UpdateRenovate .

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