What is a Reverse Mortgage?
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Probably
the best program Congress ever created for seniors. It may even be
better than Social Security since you will probably receive more money
from a reverse mortgage than from Social Security. Created in 1987
under the National Housing Act, the Home Equity Conversion Mortgage
(HECM) program was designed by Congress and signed into law by
President Reagan to provide senior homeowners a way to tap into the
equity in their home without having to sell and move from it. The loan
became known as a “reverse mortgage” because the
lender
makes payments to the homeowner, which is the reverse of a traditional
mortgage. They are intended to help “house-rich”
but
“cash-poor” senior’s access additional
income to meet
expenses.
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| Who is Eligible for a Reverse
Mortgage? |
They
are available only to homeowners 62 and older and are insured by the
federal government through the Federal Housing Administration (FHA).
There are no credit or income requirements. Even borrowers with poor
credit qualify.
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| How
do they work? |
For
homeowners who currently have a mortgage, a reverse mortgage replaces
it and allows the borrower to postpone making the normal monthly
payments for as long as the home remains the principal place of
residence of at least one of the owners. Depending on the size of their
original mortgage it usually allows for some additional funds in the
form of a tax-free line of credit or monthly payments. For those with
no mortgage it provides a tax-free line of credit or monthly payments.
When the last homeowner passes away (if they do not move or sell their
home before) their heirs will sell or refinance the home, pay off the
reverse mortgage and keep the difference.
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| What
will be left for our heirs after we pass away? |
The
whole theory behind a reverse mortgage is that your home will
appreciate faster than the accumulating principal, interest and costs.
About 15 years ago my father’s retirement was cut in half
after
Pan American Airways went bankrupt. To make ends meet they sold their
beautiful home in Los Altos, California for $1.3 million and moved
outside of Tucson, Arizona where they built a home and put the leftover
funds in the stock market. We did not know about reverse mortgages back
then. Later, I asked them how they liked Arizona. They said they were
miserable; it was 120 degrees outside, they could not leave their pet
outside because the coyotes would eat it, they missed their old
friends, neighbors, familiar shopping spots, restaurants and mostly
their home. Worse they lost a good amount of the money in the stock
market. To add insult to injury, my brother drove by their old house
six months ago and found it was for sale at $3.2 MILLION. If they had
kept their home and taken out a reverse mortgage and received $2,000
per month instead of selling it they and their heirs would have been
better off by about $1.54 million, even after the $360,000 they would
have received, due to the added appreciation in California. More
importantly, they could have stayed in their home and enjoyed it for
the rest of their lives.
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Will
it affect my Social Security, Medicare, or pensions?
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No.
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| What
are the costs in getting a Reverse Mortgage? |
HUD's
Reverse Mortgage (HECM) has become so popular that many large reverse
mortgage lenders have come up with their own version in addition to the
HECM. The one we market is Bank of America's. It is
called
The Independence Plan (IP). It was designed specifically for
homes valued over $500,000 since the HECM is aimed primarily at homes
valued at less than $500,000. With the IP, the up-front costs
are
low, generally $6,500 and depending on how much you draw out at
closing, can be as little as $500. However, the initial
interest
rate is higher than the HECM's. With the HECM, the up-front
costs
are higher but the initial rate is lower. The main reason
HUD's
costs are more up-front is because they require mortgage insurance of
2.5%. The Independence Plan (IP) does not. Both
plans have
a small monthly service fee to prepare and send out monthly statements
(in a conventional mortgage this fee is paid through an increase in the
interest rate), a Loan Origination Fee and about $2,000 in standard
closing costs for things like the appraisal, title insurance,
etc. However, all of the costs for either plan are financed
in
the loan with no out of pocket payments by you. Plus, of
these
costs are paid off only if you sell the home or after the last owner
passes away.
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| I
plan to sell my home in a few years, is this still a good idea? |
Not unless there are good reasons like you need the money to fix up the house to sell it or you are having a tough time making the existing payments and need the extra money until you sell. Why pay the closing costs for a reverse mortgage and then again when you buy your next home. The idea of a reverse mortgage is that you will stay in the house for the rest of your lives and the costs are spread out over a long period. If you sell in 2-3 years the cost are then spread out in only that period.
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| What
is the FHA/HUD insurance for? |
Congress
wanted to make sure that reverse mortgage holders could stay in their
house and make no payments during their lifetime regardless of what
happened to the economy or the company providing the loan. So, even if
your home value falls below the loan amount (like some homes which were
repossessed during the “Great Depression”) the HUD
insurance protects you and your heirs by guaranteeing that neither will
have to make up any difference between the loan amount and what the
home sells for. So, unlike conventional mortgages, the loan cannot be
“called” for any shortfall. Also, if you elect
monthly
payments for life and something happens to the bank, the insurance
guarantees the payments to you.
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| Am
I signing over my house to the government? |
Absolutely
not. This is just a mortgage on the property like a conventional loan.
The difference is that you do not make any monthly payments. When you
or your heirs sell the home, you or they, pay off your reverse mortgage
and keep any balance just like with a conventional mortgage.
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| How
can I lose my home? |
Your
home can be foreclosed on if you fail to make your property tax
payments or do not keep up your homeowner’s insurance. So,
just
keep some money set aside in your line of credit to cover these items.
Generally, people will have their home foreclosed on because they did
not make their monthly mortgage payment. You do not have to worry about
this since you make no monthly payment.
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| What
happens when I (we) die? |
Your
heirs can either sell the home and pay off your reverse mortgage
balance or they can refinance and pay it off with a conventional
mortgage. They will have up to a year to pay off the mortgage. If the
home sells for less than the amount due they are not responsible for
the shortfall. This is a non-recourse loan.
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| Can
I live longer than my reverse mortgage? |
Your
benefits are guaranteed by HUD or the lender when you take out a
reverse mortgage. If you select a monthly income it is guaranteed to
age 100 of the youngest applicant. If you select the credit line option
the amount available will be there for you no matter what happens to
the value of the home.
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| How
does age affect my benefits? |
This is the first time in your life that it
is better to be older than younger. The older you are the more money
you get.
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| I
have received several quotes and they are all about the same. |
Most
of the costs of getting a reverse mortgage are fixed. Interest rates
are established by HUD and are the same for all lenders. Other costs
like title insurance, appraisal and escrow charges generally are about
the same. However, we can adjust the margin down if you are borderline
in qualifying.
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| Are
there any advance fees required? |
This
varies from company to company. Our company does not collect one.
However, if you apply, once the appraisal has been done and you cancel,
you will have to pay that cost. Otherwise, all costs are included in
the loan.
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It
all sounds too good to be true. Is it? |
I
was a criminal investigator for over 25 years with the US Treasury
Department in Hawaii before I retired. I would not market a product
that I had not investigated fully or believed in. Will I get a reverse
mortgage when my wife and I turn 62? You bet, and I will eliminate my
$1,400 a month mortgage payment and I will have that much extra money
to spend each month, tax-free for the rest of my life. An excellent
source of information on reverse mortgages can be found at the National
Reverse Mortgage Lender’s Association’s web site.
The
process requires that you talk to an independent HUD/AARP trained
counselor. If you would like to start the application process, which
normally takes about 30-45 days, or have questions please call me at
(800) 559-0608 or (970) 587-0185 or email me @ reversemortgageone@yahoo.com. ReverseMortgageOne, Inc. is licensed
in CA
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