Are you or someone you know a senior citizen homeowner who is “house rich” but “cash poor?” If so, a reverse mortgage can solve the problem if the homeowner is at least 62, needs tax-free income with no monthly payments, and plans to stay in his or her house or condo at least five years.
WHAT IS A REVERSE MORTGAGE? Just the opposite of an amortized mortgage, which requires the borrower to make monthly payments over 15 to 30 years, a reverse mortgage pays money to the borrower whenever needed and requires no repayment until the homeowner sells the home, moves out for longer than 12 months or dies.
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When one of those events occurs, the reverse-mortgage principal and accrued interest “matures” and becomes payable in full. If the homeowner dies, the heirs can sell the home, pay off the reverse mortgage and keep the remaining equity. Or, if the heirs want to retain the residence, they can obtain a new mortgage to pay off the reverse mortgage.
Contrary to widespread myth, the reverse-mortgage lender does not “own” the home. The lender can never force the senior citizen homeowner to sell or move out. The reason is reverse mortgages are “non-recourse” without any personal liability. Only the residence is responsible for eventual repayment, even if it loses market value or the borrower lives to be 110.
To qualify for a reverse mortgage, the homeowner must be at least 62. If any co-owner is younger than 62, the residence is not eligible unless the under-62 co-owner signs a quitclaim deed conveying his/her interest to the over-62 co-owner. When there are two co-owners, both aged 62 or older, reverse-mortgage eligibility is based on the age of the youngest co-owner.
Advanced age is an advantage when obtaining a reverse mortgage. The reason is the borrower’s life expectancy determines the amount the homeowner can receive. For example, due to a shorter life expectancy, an 80-year-old homeowner will qualify for larger reverse-mortgage payments than will a 62-year-young “whippersnapper.”
THREE TYPES OF REVERSE-MORTGAGE PAYMENTS. Reverse-mortgage borrowers have a choice of how to receive their money. The alternatives are (1) lifetime monthly income (called “tenure”); (2) a lump sum for any purpose (such as a new roof or a trip around the world); and/or (3) a credit line for future borrowing (except in Texas). Most reverse-mortgage borrowers select the credit line.
Or, the senior citizen homeowner can select any combination of these choices, such as one-half monthly payments, one-fourth lump sum and one-fourth credit line. Borrowers can change their choice at any time by notifying the loan servicer.
A REVERSE MORTGAGE MUST BE A FIRST MORTGAGE. Because a reverse mortgage has a growing balance, due to principal advances and accrued interest, it must be recorded as a first mortgage.
If the home has an existing first mortgage, it can be paid off with a reverse-mortgage lump sum. As a very general rule, if the existing first mortgage plus any other liens such as a home equity loan or an IRS tax lien exceed 40 percent of the home’s market value, the residence usually will not be eligible for a reverse mortgage.
Many senior citizen homeowners obtain reverse mortgages to pay off their existing mortgage balances. The happy result is they get rid of their monthly mortgage payments, thus increasing their monthly cash flow, since a reverse mortgage requires no monthly payments.
FOUR REVERSE-MORTGAGE ELIGIBILITY CRITERIA. The three major nationwide reverse-mortgage lenders are very different, but they all use the same eligibility criteria to determine how much cash the senior homeowner can obtain.
The criteria are: (a) the adjustable interest rate at the time the reverse mortgage is originated (all reverse mortgages use adjustable interest rates); (b) the age of the youngest homeowner (minimum age is 62); (c) the lender’s appraised market value of the home; and (d) the lender’s maximum mortgage limit.
The borrower’s income and credit rating don’t matter, but the homeowner must not be currently involved in a bankruptcy, and the residence must meet minimum standards.
THE THREE MAJOR NATIONWIDE REVERSE-MORTGAGE LENDERS. Each of the three major nationwide reverse-mortgage lenders offers very different programs.
The most popular, with approximately 90 percent of the market, is the FHA plan. However, the major FHA drawback is the low lending limits, which vary by county. Borrowers owning homes in expensive communities are often disappointed with FHA.
Higher lending limits, currently up to $417,000, are offered by the Fannie Mae “Home Keeper” reverse mortgage. But the cash available is often less than the FHA program.
However, Fannie Mae is the only lender offering a “reverse mortgage for home purchase” where the senior citizen home buyer won’t have any monthly payments.
Financial Freedom Plan (FFP) offers reverse mortgages with no maximum limit for their “jumbo cash account.” The result is owners of homes worth more than $500,000 can usually obtain the largest amount with an FFP reverse mortgage.
HOW TO DETERMINE HOW MUCH CASH YOU CAN OBTAIN. Because there are three major variables to consider — the homeowner’s age, the home’s fair market value, and the reverse-mortgage lender’s maximum lending limit — computing the available cash from each of the three major programs requires a computer.
The best Web site to estimate this amount is www.FinancialFreedom.com. Enter your ZIP code, birth date, approximate market value of your home, and total of any existing mortgages and/or other liens, such as a home equity loan. The calculator will then compare all three reverse-mortgage programs, and provide the maximum amount available from each, including “growth rates” for the FHA and FFP plans.
WHERE TO FIND LOCAL REVERSE-MORTGAGE REPRESENTATIVES. Most traditional mortgage lenders do not offer reverse mortgages because of the specialized knowledge required. Before a senior citizen homeowner can obtain one, all three major lenders require independent counseling so the borrower understands the reverse mortgage pros and cons.
The largest reverse-mortgage originators are Financial Freedom Plan (which offers all three major reverse-mortgage programs), Wells Fargo Mortgage, Seattle Mortgage and GMAC Mortgage.
The Web site of the National Reverse Mortgage Lenders Association (NRMLA), at www.ReverseMortgage.org, has lots of great information that answers typical reverse-mortgage questions. However, the NRMLA calculator is incomplete because it compares only the FHA and Fannie Mae programs. It does not include the more generous FFP program, although FFP is a member of NRMLA and subscribes to its code of ethics.
The NRMLA Web site includes state-by-state lists of local reverse-mortgage originators who subscribe to the NRMLA code of ethics. But a major list disadvantage is that only names and phone numbers, plus lender Web sites, are included so prospective borrowers don’t know if the representative is nearby or across the state.
REVERSE-MORTGAGE DISADVANTAGES. Reverse-mortgage tax-free cash sounds wonderful to senior citizen homeowners who have large home equities but not enough income. However, the reality is the homeowner will be borrowing on that equity.
Prospective heirs often discourage obtaining a reverse mortgage because the homeowner will be “spending” the heir’s home-equity inheritance. However, many potential heirs encourage their senior citizen parents to obtain a reverse mortgage so they can fully enjoy their “golden years” with financial comfort.
Some reverse-mortgage borrowers object to the substantial upfront loan fees. FHA and Fannie Mae “cap” these fees at about 2 percent of the amount borrowed, plus third-party charges for appraisal fees and lender’s title insurance. Because of these fees, which are quite reasonable when amortized over five or more years, it usually doesn’t pay to obtain a reverse mortgage if the homeowner plans to stay less than five years.
Reverse mortgages have no effect on Social Security or Medicare payments. However, senior homeowners receiving SSI (Supplemental Security Income), Medicaid (Medi-Cal in California) or other welfare payments should know those benefits can be reduced if the recipient does not spend their entire reverse-mortgage income each month.
More information is available in my new special report, “Everything You Need to Know About Reverse Mortgage Pros and Cons for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.
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