Reverse mortgage

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A reverse mortgage (known as lifetime mortgage in the UK) is a loan available to seniors (62 and over in the US), and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (i.e. into aged care).^[1]

In a typical mortgage the home owner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after 30 years the mortgage is paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month.

If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the first and only mortgage on the property.^{[citation needed]}

Contents 1 Reverse mortgages in the United States 1.1 Requirements 1.2 Payment(s) (loan advances) 1.3 Costs and Interest Rates 1.4 When the loan ends 1.5 Volume of loans 1.6 Other Options 1.7 Taxes Related to the Reverse Mortgage 2 Reference 3 See also

[edit] Reverse mortgages in the United States

[edit] Requirements

To qualify for a reverse mortgage in the United States, the borrower must be at least 62. The borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. There are no minimum income or credit requirements, and for most reverse mortgages, the money can be used for any purpose. A pending bankruptcy that has not been finalized may, however, slow the process. Some types of dwellings, such as lower-value mobile homes, do not qualify. Before borrowing, applicants must seek HUD approved counseling. The counseling is a free safeguard for the borrower and his/her family, to make sure the borrower completely understands what a Reverse Mortgage is, and what the process of obtaining one is.

Reverse mortgages are offered by some state and local governments. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes.^[2] The majority of reverse mortgages are FHA insured.

[edit] Payment(s) (loan advances)

The amount of money that an individual homeowner can receive from a reverse mortgage depends on his or her age, the Federal Housing Administration (FHA) or Fannie Mae (FNMA) appraised value of the home, and the starting interest rate (effective upon closing/finalization of the loan). The location of the home may also have an impact. There is also a type of reverse mortgage for homes valued over the maximum Fannie Mae limit. These are called "cash" accounts, and are proprietary loan products.

In a reverse mortgage in the U.S., a borrower can be paid in a lump sum, monthly (payment of advances), through an increasing line of credit, or a combination of all three. The money received (loan advances) are not taxable and do not affect Social Security or Medicare benefits.

A borrower can elect to move available funds into a "set-aside" account, similar to a typical escrow account, to pay for his or her future property taxes and/or homeowners insurance. Currently, most reverse mortgage borrowers do not exercise this option and instead elect to be responsible for the payment of taxes and/or insurance on their own. It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage.

An American Bar Association guide explains that if you receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if his or her total liquid assets (cash, generally) is then greater than those programs allow.^[2]

[edit] Costs and Interest Rates

The cost of getting a reverse mortgage from a private sector lender tends to exceed the costs of other types of mortgage or equity conversion loans. Exact costs however are dependent on the particular reverse mortgage program that the borrower acquires. For the most common type of United States reverse mortgage, the HECM (Home Equity Conversion Mortgage), there is an insurance premium of 2 percent of the loan and a 2 percent origination fee in addition to normal closing costs, which are typically some thousands of dollars, but vary depending on the third-party costs (appraisal fees, title searches, etc.) that must be undertaken. Thus a $200,000 loan would have $8,000 in costs beyond the normal closing costs added onto the loan at the outset. Other programs tend to skip the insurance premium, but still require the origination fees and closing costs, though some programs will waive the initial costs if the borrower is willing to borrow the maximum or close to the maximum amount that he or she is eligible to receive. In addition, there is a monthly service charge of between $25 and $35 that is usually added to the total amount of the loan.

In all of these cases, the costs of a reverse mortgage can typically be financed through the loan itself, with the costs and fees being rolled directly into the principal balance of the loan, rather than paid by the borrower in cash. While this does permit borrowers with little or no available cash to get a reverse mortgage, it does mean that the initial loan principal will be increased, and consequently, that the fees will begin accruing interest.

Interest rates on reverse mortgages are determined on a program-by-program basis, but are typically similar to interest rates offered by Adjustable Rate Mortgages (ARMs), or at time of this writing, approximately 7-8%. All major reverse mortgage programs have adjustable interest rates that are adjusted on an annual, semi-annual, or monthly basis. Due to the fact that reverse mortgages have no fixed duration, there are no reverse mortgages with fixed interest rates.

Some state and local governments offer low-cost reverse mortgages to seniors, which tend to have more favorable interest rates and fewer or no fees associated with them. However, as mentioned above, these programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.^[3]

[edit] When the loan ends

The loan ends when the homeowner dies, sells the house, or moves out of the house for 12 consecutive months or more (for example, to go into an assisted living home). At that point, the reverse mortgage can be paid off by the proceeds of the sale of the house, or refinanced by the heirs of the homeowner's estate. If the proceeds exceed the loan amount, the owner of the house (if moving out or selling) receives the difference; if the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance that the bank has, on the loan) makes up the difference.

In most cases when the borrower moves out of the property or passes away, as long as the borrower (or his estate) provides proof to the lender that he is attempting to sell the home or obtain financing to pay off the outstanding debt, the investor will allow him up to one year to do so. After the one year extension period is up, the lender cannot provide any further extension of time to the borrower (or estate).

The technical term for this cap on debt is "non-recourse limit." It means that the lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off.^[2]

[edit] Volume of loans

The most popular type of reverse mortgage in the U.S. is the FHA-insured Home Equity Conversion Mortgage (HECM) which accounts for 90% of all reverse mortgages originated in the U.S. As of February, 2007 the federal cap of 275,000 HECM loan guarantees had been issued since the program's inception in 1989. Legislators subsequently suspended the cap until September 1, 2007 allowing additional HECM loan guarantees to take place.

Program growth in recent years has been very rapid. The National Reverse Mortgage Lenders Association (NRMLA)^[4] reports that 55,659 HECM loans were endorsed through the first nine months of fiscal year 2006, an 83 percent increase over the 30,404 loans endorsed during the same period in the prior fiscal year.

Section 255 of the National Housing Act, which governs the HECM program, limits the aggregate number of outstanding HECMs to 250,000. Conceivably, the cap could be reached in the next 12-24 months. Efforts are currently underway to remove or expand the cap on the number of HECM loans that can be issued.

[edit] Other Options

The biggest drawback with reverse mortgages are the high upfront costs. Some seniors may want to consider other options to tap their home equity, particularly if they do not think they will remain in the home for at least five years.

For example, a home equity line of credit (HELOC) requiring interest-only payments for 10 years can be used. These loans typically have very low (or zero) upfront costs. The drawback is that, unlike a reverse mortgage, the borrower must make a monthly (interest-only) payment to the lender. These payments can be made for several years by drawing on the line of credit itself. Of course, the balance needs to be paid off when the house is sold or the owner dies - just as with a reverse mortgage. HELOCs also tend to have higher interest rates (HELOCs are usually based on the prime lending rate) than the FHA monthly HECM which is based on the 1 year constant maturity Treasury.

Other options that can free up home equity but avoid the high upfront costs of a reverse mortgage include: 1) intra-family loan or sale-leaseback and, 2) selling and moving to a less expensive dwelling or location. However, when selling the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Currently, there is a coordinated government program called "Aging in Place" that strives to assist the homeowner in staying in his home and neighborhood, if that is his desire. Various studies, including AARP, show that over 80% of elderly homeowners do not want to move.

[edit] Taxes Related to the Reverse Mortgage

An American Bar Association guide to reverse mortgages advises that generally,

• the IRS does not consider loan advances to be income,
• annuity advances may be partially taxable, and
• interest charged is not deductible until it is actually paid, that is, at the end of the loan.

("Reverse Mortgages: A Lawyer's Guide," American Bar Association 1997.)

[edit] Reference

[edit] See also

• Mortgage loan
• Equity release