An Overview of Reverse Mortgages
An Overview of Reverse Mortgages
For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home-equity loan. But a conventional loan really doesn't free up the equity because the money has to be paid back with interest. A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person's lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title "reverse mortgage".
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. Over the last five years the number of reverse mortgages nationwide has tripled. The uses of this untapped wealth are only limited by a person's imagination.
For those seniors who are less fortunate but own a home, a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.
A reverse mortgage is a loan against the equity in your home that provides you cash advances, but requires no mandatory monthly re-payments during the life of the loan. If the interest is unpaid, it is allowed to accrue against the value of your home. If you do choose to pay any portion of the interest, it may be deductible against income, as would any mortgage interest.
You must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home] in order to qualify for a reverse mortgage.
There are no income, asset or credit requirements. It is the easiest loan to qualify for.
A reverse mortgage is similar to a conventional mortgage. As an example:
The proceeds from a reverse mortgage are tax-free and available as a lump sum, fixed monthly payments for as long as you live in the property, a line of credit; or a combination of these options. These proceeds can be used for any legal purpose you wish:
The amount of reverse mortgage benefit for which you may qualify, will depend on
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds.
The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries.
There are three reverse mortgage loan products available, the FHA - HECM (Home Equity Conversion Mortgage), Fannie Mae - HomeKeeper®, and the Cash Account programs. Over 90% of all reverse mortgages are HECM contracts.
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to your withdrawal of additional funds.
You must participate in an independent Credit Counseling session with a FHA-approved counselor early in the application process for a reverse mortgage. The counselor's job is to educate you about all of your mortgage options. This counseling session is at no cost to the borrower and can be done in person or, more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.
Keeping money in a reverse mortgage line of credit will not count as an asset for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. However transferring the money to an investment or to a bank account would represent an asset and would trigger a spend down requirement.
If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time (unlike a traditional Home Equity Line whose credit limit is established at origination). If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt.
The following material was taken from an article titled " The Future in Reverse" by Rosana Remakom
A Brief Summary of Reverse Mortgages
Using the Internet a person can get an instant quote on how much reverse mortgage money is available from the home. The first online calculator is found at the National Reverse Mortgage Lenders Association under the following URL http://nrmla.edthosting.com/.
The second one is available from the AARP at http://www.rmaarp.com/
Home Equity Loan vs. Reverse Mortgage
Many people ask what the differences are between a Reverse Mortgage and a Home Equity Loan when examining options to access equity for a senior homeowner. Below is a side-by-side summary table comparing the attributes of both options:
Reverse Mortgages and Long-term Care Insurance
According to recent statistics, about 60% of the population will require some form of long-term healthcare services during their remaining lifetimes. A combination of home care, assisted living and nursing homes stays can last three to five years or longer. A senior's average stay in a nursing home is about 2.5 years and the costs can easily exceed $90,000 annually. Home care can be expensive as well.
Most Americans recognize the need for a long-term care insurance program to both protect their assets and relieve any potential burden on their families. One major obstacle often voiced by seniors is, "How do I pay for this insurance?" Many seniors no longer have the income necessary to pay the premiums for long-term care coverage and most are not comfortable utilizing their savings for this purpose. While an individual can always ignore the issue and simply rely on the state Medicaid to provide such future care, this option may not always be the best one since a senior wanting Medicaid is required to spend down his assets to $2,000 or less before qualifying for these government programs. In addition a healthy spouse at home may be left with inadequate income and assets as a result of seeking Medicaid benefits. Also many states favor nursing homes for Medicaid services and relying on this welfare program will in most cases take away the options of receiving care at home or in an assisted living.
Traditionally, seniors have had three choices for funding the possibility of needing pay to help for chronic illness and professional care.
Now there is a fourth choice available - taking advantage of the opportunities offered by reverse mortgage programs.
Proceeds from a reverse mortgage loan for paying long-term care insurance are typically set up as a monthly income to ensure money is available through the life of the policyholder.
The American Homeownership and Economic Opportunity Act of 2000 (H.R.5640) signed into law on December 27, 2000, supports the use of reverse mortgage proceeds for both long term care and long-term care insurance.
When a reverse mortgage is used to fund Long-term Care Insurance, the senior homeowner is using some of the equity in the house to protect the value of the home (and perhaps other assets), so the owner can remain confident about his or her estate value and that the heirs will receive the legacy the senior worked so long and hard to build.
The purpose of the following example is to show the advantages available to a senior homeowner to fund a long-term care (LTC) insurance policy with a reverse mortgage. While the premiums for LTC insurance may be considered high when paid out of a senior's current income, these same premiums become far less significant when compared to the value of a typical senior's home.
In the following example, a 65-year old has qualified
If the same 65-year old accessed some of the equity in his home, through the utilization of a reverse mortgage, he would receive an initial loan with the following attributes:
Based on the information above, you will note the following from the analysis that follows:
1. Pay the annual insurance premiums from current income.
$71,250 total out-of-pocket
2. Use some of the proceeds of a reverse mortgage to pay the annual insurance premiums, but voluntarily pay back only the interest costs on those borrowed funds each year.
$45,502 total out-of-pocket
3. Use the Proceeds of Reverse Mortgage and Allow the Interest to Accrue.
$0 out of pocket
The Risk of Serious Illness and Reverse Mortgages
Seniors have worked hard all of their lives to create a financial estate from which they plan to live their retirement years to the fullest and leave a significant legacy to their beneficiaries. Among the primary issues threatening this goal for senior homeowners today are the costs and management of a serious illness and the way it may affect their current lives and future plans.
For a married couple, the anxiety surrounding the incapacity of one spouse and their sudden dependence on the other can be disquieting and often overwhelming. For all seniors, the hope of living longer combined with the fear of outliving their finances is becoming a startling reality as expenses continue to rise and savings rates remain historically low. Senior homeowners may face any of the following circumstances regarding the costs of long-term health and medical care should serious illness befall them:
A reverse mortgage is the one financial instrument that can help to address many of these uncertainties. Through the withdrawal of some of the equity in a senior homeowner's primary residence and the proper utilization of those funds, a number of factors are changed which significantly improve the state of affairs regarding the potential risks of a serious illness.
Estate Planning and Reverse Mortgages
While a home may hold a great deal of emotional value for a family, the reality is that, in most cases, the property is sold after the owner's death and the assets are liquidated. The heirs are often forced to sell the property under "less than ideal" conditions. After the sale, which may drag on due to the state of the real estate market, heirs may be faced with inheritance and/or capital gains taxes on the proceeds. In the end, the net proceeds are often far less than the actual or perceived value of the home. A reverse mortgage, and the use of some of the proceeds to purchase life insurance, can greatly alleviate many of these issues.
The full value of a home owned outright (mortgage free) is subject to estate tax, but a reverse mortgage lien against the property reduces its value - thus effectively lowering the estate taxes. A reverse mortgage must be repaid when the borrower permanently leaves the property. At death, the full value of the property would not be included in the estate valuation for tax purposes because the accumulated debt of the reverse mortgage would not yet have been repaid thereby reducing the property value, which should lower any applicable taxation.
In addition, accrued interest in the reverse mortgage may be available as a tax deduction upon repayment of the loan (just as forward-mortgage interest is deductible against income.) [NOTE - it is recommended the borrower consult their tax advisor]
When tax-free monies from a reverse mortgage are used for the purpose of funding insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner.
A reverse mortgage can offer senior homeowners the ability to strengthen both their current financial cash flow challenges as well as help protect their financial future. When a senior homeowner utilizes these funds to purchase investments that protect their health and well being and enhance the total worth of their estate, the value of a reverse mortgage is truly realized.