June 2007 Topic - "Reverse Mortgages"

01.  Reverse Mortgage 101
02.  Advantages & Disadvantages of a Reverse Mortgages
03.  Frequently Asked Questions and Answers

1.Reverse Mortgage 101

Reverse Mortgages have increased in popularity recently. A reverse mortgage is a type of loan only available to seniors over the age of 62. This type of mortgage is used to release the home equity to the homeowner in a lump sum or multiple payments. The loan is repaid when the homeowner dies, or the house is sold.

They have helped many seniors stay in their homes without the financial burden that many Americans feel. Different people opt for this type of mortgage for a variety of reasons. Often it is used to supplement retirement money, or pay for healthcare costs that many seniors encounter. It may also be used for home improvements or just to have extra money in the bank for emergencies. All reverse mortgages are not taxable and usually do not affect Social Security, Disability or Medicare benefits.

There are three common types of reverse mortgages. The first is single purpose reverse mortgages. These loans are not available everywhere and must be used for one purpose. The lender will specify the purpose. Some reasons may include home repairs, or property taxes. The government or a nonprofit lender gives these loans. The benefit to these types of mortgages is they generally have low costs. These loans are only given to people whose income is low or moderate. The second and third types of reverse mortgages are Home Equity Conversion Mortgages also known as HECM and proprietary reverse mortgage. These are more costly than a single purpose loan.

These loans can be obtained by anyone 62 years of age or older. There are no income requirements. Prior to applying for either of these loans you must meet with a counselor from an independent government approved housing counseling agency. The purpose of this is to inform you of the costs of obtaining a reverse mortgage and explain in detail all alternatives and other programs that may be available to you.

The amount of money you can borrow depends on different things such as your age, how much your home is worth, the interest rates and other factors. HECMS allow you to choose how the money is paid to you. Generally your options are a line of credit or monthly payments. A line of credit is when you are able to withdraw money in the amount that you choose at different times as long as it does not exceed the maximum allowed. Monthly payments will be a specified amount of money that will pay to you for a certain amount of time. You will also have the option to receive both.

As with all mortgages always be aware of fees that are being charged. The standard fees are as follows an origination fee of 2 percent of the homes value, and a mortgage insurance premium also of 2 percent of the homes value. To do the math if your home is worth $200,000 you are looking at $8,000 in fees. Plus sometimes the lender tacks on their fees.

The amount you owe on a reverse mortgage increases as time passes. Interest will be charged on the outstanding balance. It is then added to the amount you owe each month. In turn this means your total debt increases over the life of the loan as payments are advanced to you and interest accrues on the loan.

2. Advantages & Disadvantages of a Reverse Mortgages

Advantages of a Reverse Mortgage

Supplemental Income: For many seniors the costs of living and healthcare is not covered by their pensions or social security. A reverse mortgage offers them the chance at financial freedom. As an elder there are many things to worry about financially since they usually do not have many sources of income. A reverse mortgage is a nice cushion if needed.

Pay off existing mortgage: It is sometimes used to pay off an existing mortgage so that you are no longer worried about breaking the bank to make the monthly payments.

Extra Savings: Some borrowers take out a line of credit. Therefore it is on a need to basis. Any money they may need they have. Anything that is not taken out remains equity in the home.

Helping loved ones: As a senior you may want to help out a loved one without touching your bank or compromising your way of life. This mortgage can give you the extra cash to do so.

Health care costs: The cost of health care is sometimes outrageous. The money may be used to cover expenses for you and your spouse's health.

Home improvements, insurance or taxes: With the rising cost of taxes and insurance it is difficult sometimes to afford to remain in your home. Many people simply go into foreclosure due to the fact that they cannot afford taxes and insurance. Seniors really get hit hard since they usually do not have the extra income to pay for the increases.

You keep the title to your home: You are still the owner of the home. You retain the title even though you are not paying down the balance of your mortgage.

You never make another monthly payment: You live in your home and actually get paid the equity from it.

Your loan only becomes due when you leave the house: You do not owe any money on the home until it is no longer being lived in.

Disadvantages of a Reverse Mortgage

Fees: There are many fees associated with a reverse mortgage. It can get very costly.

Loss of Equity: There will be less equity left to your children or other heirs to inherit.

3. Frequently Asked Questions and Answers

What is the difference between a reverse mortgage and a regular mortgage?
A regular mortgage is available to anyone with no age restrictions and you apply money monthly to bring down the balance and increase the equity in your home. On the other hand, a reverse mortgage allows you to live in the home with out paying down the balance. You are taking the equity of your home.

Are the proceeds of a reverse mortgage tax free?
Generally yes. However, if you have features such as an annuity then you will be taxed.

Are there any income requirements to qualify for a reverse mortgage?
There is no income requirement to qualify on a HECMS or a proprietary reverse mortgage. However there is to qualify on a single purpose loan.

Do these mortgages have fixed or variable rates?
They can have either type of rate. More commonly though they are variable and will change according to the market.

Does the homeowner retain the title to the home?
Yes, the homeowner will keep the title to the home and be responsible for all taxes, repairs and other expenses associated with the home.

Are there any upfront fees to taking out a reverse mortgage?
Yes. There are many upfront fees, which include but are not limited to closing costs, and fees charged by the lender.

What are the guidelines to be eligible for a reverse mortgage?

1. You must be at least 62 years old.

2. You must hold title to your property.

3. Your mortgage must not be too high in relation to
     the money you are applying for.

4. You must get your home appraised.

5. A termite inspection is required.

If my credit is really bad, can I still obtain a reverse mortgage?
Yes, your credit does not matter because you are not making any payments.

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Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us. To reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 06
Rev.1
June, 2007