Reverse Mortgage

The baby boom generation has graced the golden age. Today, seniors have become a significant consumer segment in the economy. With the fast growing population of elders and retired citizens, financing companies are finding ways to meet the core of seniors' needs. One such benefit that seniors greatly enjoy is reverse mortgage financing.


1. Defining a Reverse Mortgage

A reverse mortgage is an outlet for elders to enjoy the true value of their homes as cash treatments. By definition, reverse mortgages are loans handed out to seniors to convert part of their home equity as tax-free income. The design of reverse mortgage for seniors allows its beneficiaries to have a stronger sense of financial independence by giving them extra income without the added burden of paying a monthly return on loans.

Reverse mortgages can be issued for borrowers without their selling their homes, giving up the title, or making monthly mortgage payments. This loan is initially useful for people who are cash poor, but asset adequate in their financial standing. With this extra source of ready cash, seniors can decide what to do with the money, whether they want to spend it on an extra trip abroad, ensure their daily living allowance, or improve their homes. The word "reverse" denotes that the flow of money in this loan starts from the lender back to the borrower. The borrower can choose to be paid in lump sum or monthly allowance. Reverse mortgage loans will not be repaid until the borrower leaves his home.

2. Different Kinds of Reverse Mortgages

There are two major forms of reverse mortgages, Home Equity Conversion Mortgage (HECM) and Home Keeper Mortgage. HECM offers seniors the room to tap the equity of their home and convert it into ready cash, with all the flexibility and understanding given to the senior borrower. This loan is primarily designed by the U.S. Department of Urban Housing and Development and the Federal Housing Administration. With HECM, borrowers can use the proceeds from their loans as they wish and choose the payment plan that they prefer. Once the loan becomes active, the value of the loan is supported by the value of your home that you do not need to pay until you leave your home at your death, sell the property, or do not occupy the home as a primary residence for 12 months. The reverse mortgage is designed for seniors to repay their loans by selling their estate, although this is not required. Once the loan is marked for repayment, you have to pay in a lump sum.

The Home Keeper Mortgage is a reverse mortgage that offers more options than the HECM. This is designed by Fannie Mae, the largest investor for home keeper mortgages. In this plan, borrowers can choose between monthly payments for life, a line of credit, or a combination between monthly payment and line of credit. With the line of credit in place, borrowers who opt for home keeper mortgage can finance their new home using this type of loan. In this sense, the borrower will need less cash to buy a new home or pay for new mortgage bills in the future.

3. Difference of HECM and Home Keeper Mortgage

HECM's and Home Keeper Mortgages essentially follow the same set of principles in which reverse mortgages are defined. However, seniors are given the power to choose on these two plans, or any other reverse mortgage products on the market, so the borrower can decide what is the best financial plan for him. In Home Keeper Mortgages, the benefits are reduced for couples. Interest rates are also higher in Home Keeper Mortgages than HECM. The line of credit for HECM grows, whereas Home Keeper Mortgages does not. Fannie Mae also offers a higher lending limit and a higher monthly payment for their borrowers compared to HECM.

4. The Reverse Mortgage Advantage

Reverse mortgages are specifically designed to give seniors the best quality of life through different financing methods. They are appropriately drawn, so seniors can have extra income during their retirement years. With reverse mortgages, seniors do not need to go back to work just to make ends meet. For some, reverse mortgages are luxury loans that will allow them to take a tour around the world, buy a rest house, or buy their luxury materials that they would not have bought when they were younger.

Reverse mortgages allow you to retain your home and maintain your ownership. This gives you home security, as the amount of your loan is taken from the value of your home. With home security, you will have less stress thinking about the repayment of your loans. Some seniors are forced to go into a retirement home since they cannot keep up with the cost of living independently. With reverse home mortgages, you get your extra cash without having to bail out on your most precious asset. Reverse mortgage loan is tax free, since the money received from home mortgage loan is not considered income. With no tax-hit, your Medicare and social security benefits will not be affected.

Reverse mortgages give you the freedom and flexibility to choose where your money should go. Unlike other loans where the amount taken is spent to a specific product, seniors have the extra layer of choice to do what they want with the money.

5. Eligibility Requirements for Reverse Mortgages

Getting a reverse mortgage should not take much hassle, as they do not impose any minimum or maximum limits on your income. For starters, you should be at least 62 years old to be eligible for a home reverse mortgage. You should also own a home, which is clear from major liabilities, or have a low remaining balance in your home mortgage. Potential borrowers are required to consult an HDA approved reverse mortgage counseling, although this particular requirement varies between reverse products. Your home should be either a one to four-unit dwelling or a condominium unit.

There are no health, income, or credit requirements when one applies for a home reverse mortgage. If you have loans from an outstanding home mortgage, you can still be eligible for a home reverse mortgage, provided you give utmost attention in paying off these loans. You could use the funds taken from the reverse mortgage to pay off these loans. Reverse mortgages are only pegged with your primary residence. Therefore, it will be hard to get a second plan for your secondary home. The main requirement for reverse mortgages is that the borrower should be living in their home, and leaving their primary residence will result in your loan being marked for repayment.

6. Fees Involved

Once you decide on the loan process, there are a series of fees that should be shouldered by the borrower before the transaction is completed. The basic charge from a reverse mortgage is an origination fee that covers the lenders cost in processing your loans. The origination fee is pegged at $2,000 or 2% of the maximum claim amount of the mortgage. The borrower can finance the origination. Anything more than $2,000 or 2% of the mortgage amount is in violation of the reverse mortgage terms.

In HECM, the mortgage is insured by the Federal Housing Authority. Thus, a mortgage insurance premium should be paid to protect the lender from having your loan amount balloon greater than the value of your own home. In a reverse mortgage, the amount of your loan repayment should not exceed the value of your own home. The mortgage insurance premium can be paid in cash or financed by the borrower.

There are also a flurry of costs associated with closing the transaction. For more information, it is best to ask your reverse mortgage counselor on these costs. Closing costs can include appraisal fee, credit report, title insurance, recording fees endorsement, settlement fees, termite inspection, flood zone inspection, attorney's fee, and intangible tax. These fees can be settled in cash or financed by the borrower. You can also deduct these costs from your principal borrowing limit from your reverse mortgage.

7. Getting Your Reverse Mortgage Loans

Once your reverse mortgage is approved, you can start receiving your loan proceeds. While the methods are different among reverse mortgage products, the general terms of fund transfer is done either by lump sum payment or monthly payment.

Monthly payments may be paid out in equal amounts, as long as you occupy your home as your principal residence. Your payment will not stop until you leave your home, sell your property, or until your death. There is also a term payment option where you can get monthly payments for a specific period of time. This plan gives you a higher monthly payment which can be useful for elders who need extra income for quick solutions, or to prepare yourself to live in a group housing or move into a community. With the term option, you will not be required to pay your reverse mortgage once your monthly payment stops. Instead, you will only repay the loan once you leave your home.

You can use your reverse mortgage loan as a line of credit with the amount equal to your principal limit. With the line of credit option, you can apply for a loan advance whenever you need it, as long as you stay in your primary residence.

8. Preparing Yourself for a Reverse Mortgage

A reverse mortgage is a financing option with the seniors in mind. However, like all financing tools, potential borrowers should examine the advantages and consequences of reverse mortgages to determine if this loan is right for them. To make an informed decision about HECM of Home Keeper Mortgage, you must consider your financial goals and analyze if reverse mortgages can help you achieve these goals. At the same time, if there are alternatives that can help you reach your financial goals, then you can also consider them before committing to reverse mortgage loans.

You should ask yourself why you need the extra money. Knowing what you will eventually do with it will give you a clearer picture on the viability of your loan. If you need the reverse mortgage for emergency expenses, maybe you do not have much of a choice. You may be looking for a monthly income for the rest of your life or funds to cover a short-term financial drain. Allot time to think about your capability to secure your home and live up to the requirements of the reverse mortgage terms. To tackle these questions, you can talk to your tax advisor or financial consultant to fully understand the weight of this financial decision.

9. Finding a Reverse Mortgage Agent

Getting a reverse mortgage starts by finding a trusted agent to handle this aspect of your finances. You can call a commercial bank, a mortgage company, or a credit union, so they can help facilitate your reverse mortgage loans for you. You can also go directly to your financial advisor who can refer you to a reverse mortgage consultant. You may find local non-profit agencies that may also provide information on different housing or senior services.

Before applying for a reverse mortgage, you are required to attend a consumer education session. This will ensure that the borrower understands the repercussions and responsibilities attached to reverse mortgage loans, and that you are presented with alternatives that may be appropriate for achieving your financial goals. You can get a counseling session from a HUD approved counseling agency on reverse mortgages.

The most critical aspect before committing to your reverse mortgage loans is to have the best information possible. If you do not understand a term in your reverse mortgage, it is better to supply your questions now than overlook the consequences in the future. In the end, home reverse mortgages are one of the many vehicles that can help you achieve your financial goals. While it is best designed for seniors, you must enter the terms of these loans with full confidence, so you can get the most out of your reverse mortgages.
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