Reverse mortgage

From Wikipedia, the free encyclopedia

The neutrality of this article is disputed. Please see the discussion on the talk page. Please do not remove this message until the dispute is resolved. (March 2009)
A reverse mortgage is a form of equity release (or lifetime mortgage) available in the United States. It is a loan available to seniors aged 62 or older, under a Federal program administered by HUD. It enables eligible homeowners to access a portion of their equity. The homeowners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof. The homeowners' obligation to repay the loan is deferred until owner (or survivor of two) dies, the home is sold, they cease to live in the property, or they breach the provisions of the mortgage (such as failure to maintain the property in good repair, pay property taxes, and keep the property insured against fire etc). The owner can be out of the home for up to 364 consecutive days (i.e., into aged care).[citation needed] In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit, increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not like to take a second or third lien position behind a reverse mortgage because its balance increases with time. It is rare to find reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced. A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
Contents
[hide]

1 Reverse mortgages in the United States

o o o o o o o o

1.1 Reverse mortgage proceeds 1.2 HECM for Purchase 1.3 Costs and interest rates 1.4 HUD counseling 1.5 Related taxes 1.6 When the loan comes due 1.7 Volume of loans 1.8 Other options

2 Criticism 3 See also 4 References 5 External links

[edit]Reverse

mortgages in the United States

To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age and must occupy the property as their principal residence.[1]There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payment. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most 1-4 family dwellings, FHA approved condominiums and PUD's will qualify. Manufactured housing qualify based on standard FHA guidelines. Before starting the loan process, applicants must take an FHA approved counseling class and present a certificate of completion of the course. Department of Housing and Urban Development (HUD). The counseling is meant to serve as a safeguard for the borrowers and to ensure they completely understand what a reverse mortgage is. The maximum lending limit varies by county, but may not exceed $625,000.00. The loan size a borrower qualifies for is determined by the borrower's age, the value of the home, and the home's location.

[edit]Reverse

mortgage proceeds

The amount of money available to the consumer is determined by five primary factors:

The appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house.

The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the LIBOR index or 1 Year CMT. The age of the senior (The older the senior is, the more money he/she will receive).

Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments may be set up as "Tenure" payments, which are paid to borrowers for the rest of their lives, no matter how long they live, or "Term" payments, which last for a predetermined period.

The value of the property, and whether that value is higher than the national loan limit set by HUD.

All these factors contribute to the Total Annual Lending Cost (TALC) as defined by the US Federal Government Regulation Z, the single rate which includes all the loan costs. The specific formulas to calculate the impact of the factors listed above can be found in Appendix 22 of the HUD Handbook 4235.1.[2] There are reverse mortgages for homes valued over the maximum limit. These are called "Jumbo" reverse mortgages, and are generally offered as proprietary reverse mortgages. For homeowners of higher-valued homes, a Jumbo loan can provide a larger loan amount. However, these loans are currently uninsured by the FHA and their fees are often higher. The money received (loan advances) from a reverse mortgage is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide[3] to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if his or her total liquid assets (cash, generally) is then greater than those programs allow. [4] It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage. Once the reverse mortgage is established, there are no restrictions on how the funds are used. In addition to the tenure monthly payments, the borrower has the option of moving the entire amount of money into investments, or they can simply take the money and spend it as they wish. Among the options of interest bearing instruments, the borrower can keep them with the lender and (These accounts grow by the same percentage as the interest rate of the loan), move the funds to a directed account with a financial specialist (This option is risky unless you direct the investment options of the financial specialist), or withdraw the funds and manage their investment themselves.[citation needed]

[edit]HECM

for Purchase

The Housing and Economic Recovery Act of 2008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceedsthe so-called HECM for Purchase[5] program, effective January 2009. The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs,

i.e., handrails, one-level properties, ramps, wider doorways, etc. Texas is the only state that does not allow for reverse mortgages for purchase.

[edit]Costs

and interest rates

The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there will be the following types of costs: 1. Mortgage Insurance: 2% (of the appraised value) 2. Origination Fee: The cap is $2500 or 2% of the first $200,000 and 1% thereafter, whichever is more, with an overall cap of $6000. 3. Title Insurance (varies) 4. Title, Attorney, and County Recording Fees (varies) 5. Real Estate Appraisal $300$500 6. Survey (may be required) $300$500 In addition, a monthly service charge (between $25 and $35) is usually added monthly to the balance of the loan. In all of these cases, except the Real Estate Appraisal, the costs of a reverse mortgage can be financed with the proceeds of the loan itself. Interest rates on reverse mortgages are determined on a program-by-program basis, because the loans are secured by the home itself, and backed by HUD, the interest rate should always be below any other available interest rate in the standard mortgage marketplace for an FHA reverse mortgage.[citation needed] Prior to 2007, all major reverse mortgage programs had adjustable interest rates. Such adjustable rate reverse mortgages are still being offered which are adjusted on a monthly, semi-annual, or annual rate up to a maximum rate. Several lenders now offer FHA HECM reverse mortgages that have fixed interest rates.[6] Some fixed rate reverse mortgages limit the cash proceeds to half of that offered by adjustable rate reverse mortgages. The borrower(s) will be required to take out the entire amount offered at closing. Some state and local governments offer low-cost reverse mortgages to seniors. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes, [4] but most of them often have more favorable interest rates and fewer or no fees associated with them. These programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.[7]

[edit]HUD

counseling

To apply for an FHA/HUD reverse mortgage, a borrower is required to complete a counseling session with a HUD-approved counselor. The counselor will explain the legal and financial obligations of a reverse mortgage. After the counseling session, the borrower receives a "certificate of counseling" that is required before the loan application can be processed.

[edit]Related

taxes

The American Bar Association guide[3] advises that generally,

the Internal Revenue Service does not consider loan advances to be income, annuity advances may be partially taxable, and interest charged is not deductible until it is actually paid, that is, at the end of the loan. The mortgage insurance premium is deductible on the 1040 long form.

[edit]When

the loan comes due

The loan comes due when the borrower dies, sells the house, or moves out of the house for more than 12 consecutive months. Once the mortgage comes due the borrower or heirs of the estate will have an option to refinance the home and keep it, sell the home and cash out the equity, or turn the home over to the lender. If the property is turned over to the lender the borrower or the heirs have no more claim to the property or equity in the property. The lender has recourse against the property, but not against the borrower personally nor against the borrowers heirs, referred to as "non-recourse limit." Once all borrowers on a reverse mortgage passes away the heirs are granted 6 months to sell the home, refinance it, or to make the decision to turn the home over to the lender.

[edit]Volume

of loans

Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As of May 2010, there were 493,815 active HECM loans.[8] As of 2006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000.[9] However, through the annual appropriations acts, Congress has temporarily extended HUD's authority to insure HECM's notwithstanding the statutory limits.[10] Program growth in recent years has been very rapid. In fiscal year 2001, 7,781 HECM loans were originated. By the end of fiscal year 2008, the annual volume of HECM loans topped 112,000 representing a 1,300% increase in six years. For the first seven months of 2010 (ending July 31) 66,497 loans were originated and insured through the HECM program.[11] Loan volume is expected to grow further as the U.S. population ages. The U.S. senior population is expected to increase from 35 million in 2000 to 64 million in 2025, and seniors are expected to make up a larger share of the population.[12]

[edit]Other

options

A drawback to reverse mortgages are the high upfront costs. This upfront cost is tempered by the lower interest rate over time, but some seniors choose other options to draw on their home equity, particularly if they don't plan to remain at the property more than five years. Other options which can free up home equity but avoid the high upfront costs of a reverse mortgage include: 1) intra-family loan or sale-leaseback and, 2) selling and moving to a less expensive dwelling or location. However, when selling the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Currently, there is a coordinated government program called "Aging in Place" intended to assist homeowners wishing to remain in their home and/or neighborhood. Studies conducted by various agencies, including AARP, show that over 80% of elderly homeowners do not want to move.[4] No cost and low cost mortgages are available for those homeowners who anticipate moving from the home in the near future. For example, they may select a home equity line of credit, commonly called a "HELOC", requiring interest-only payments for 10 years. These loans typically have very low (or zero) upfront costs but the interest rates are usually slightly higher than a reverse mortgage. Since monthly payments are required on a HELOC, borrowers need to qualify based on their income and credit score. Oftentimes, seniors who may be on a limited fixed income can't get approved for a HELOC for this reason. Reverse mortgages do not require monthly payments and, as a result, income and credit score are not considered as part of the approval process.

[edit]Criticism
Reverse mortgages have been criticized for three major shortcomings: 1. Being expensive. Reverse mortgages can cost $8,000 or more to enter into, as compared with other types of loans which often cost less than $5,000. 2. Being confusing to those entering into them. Many seniors entering into reverse mortgages don't fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this.[citation needed] But in a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see. [13] 3. Compound Interest. Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that all of the home equity will be depleted when the loan becomes due. That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of

the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, no assets in the estate, if applicable.

n 2007, the finance minister of India introduced a concept well-known and widely accepted in the West:

Reverse Mortgage.

Reverse Mortgage: What is it? A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan. How does it work? In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Instalments (EMIs). In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs. The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one in which, the tenure is 15 years and the owner of the house and his/her spouse continue to live in the house till their death -- which can occur later than the tenure of the reverse mortgage. Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house. What are the features of this loan? The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India [ Get Quote ] have the following features: Any house owner over 60 years of age is eligible for a reverse mortgage. The maximum loan is up to 60 per cent of the value of the residential property. The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company). The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion. The revaluation of the property has to be undertaken by the bank or HFC once every 5 years. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

How is the loan paid? With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow. When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home. What happens after the death of one or both of the spouses? If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. How much of an annuity income can my house generate using reverse mortgage? The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12 per cent to 14 per cent. What is a loan to value ratio? Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent. So, for e.g., if you pledge a property worth Rs 60 lakh (Rs 6 million), then the loan amount that you can get is Rs 36 lakh (Rs 3.6 million). Does a person's age affect the amount of annuity paid? It certainly does. Higher the age, higher the annuity! Everything else remains the same. Why is this scheme not popular? Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps because better awareness had not been created about the product. Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years. The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.

Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities compound the problem significantly. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But how is it possible? The reverse mortgage scheme offered by some of the leading banks in India could bring the required answers to the suffering senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream due to its illiquid nature. The Union Budget 2007-2008 had a great proposal which introduced the Reverse Mortgage' scheme. The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company (HFC) and the bank or HFC pays the person a regular payment. The good thing is that the person who reverse mortgages' his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it. Where is the catch? The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the placce, and to recover the loan. It passes on any extra amount to the legal heirs. The whole idea is entirely opposite to the regular mortgage process where a person pays the bank for a mortgaged property. Hence it is called reverse mortgage. This concept is particularly popular in the west. The draft guidelines of reverse mortgage in India prepared by RBI have the following salient features:

Any house owner over 60 years of age is eligible for a reverse mortgage. The maximum loan is up to 60% of the value of residential property. The maximum period of property mortgage is 15 years with a bank or HFC. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion. The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs. Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.

A reverse mortgage can provide money when you need it, but do your homework before applying for a reverse mortgage. If your income from retirement funds, savings and Social Security benefits don't cover your expenses, or you'd like the financial freedom to enjoy your retirement years a bit more, you can use the equity in your home to apply for a reverse mortgage.

What is a Reverse Mortgage? In a reverse mortgage, also known as a conversion mortgage, the home is used as collateral to get cash. This is similar to a standard mortgage, but with a reverse mortgage the homeowner doesn't need an income to qualify and there are no monthly loan payments. With a reverse mortgage, the loan and the interest on the loan are paid off when the property is sold. Reverse mortgages in the US are administered by the US Department of Housing and Urban Development (HUD), and the program is called the Home Equity Conversion Mortgage (HECM). How Do You Qualify for a Reverse Mortgage? To be eligible for a HECM reverse mortgage:

You must be age 62 or older. You must either own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse mortgage. You must live in the home. The home can be a single family home or a 1-4 unit home as long as one unit is occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible. You must receive consumer information from an approved HECM counselor before obtaining the loan. Contact the Housing Counseling Clearinghouse at (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders in your area. Note: The US Government Accountability Office has found problems with HUD reverse mortgage counseling, so be careful that you are given complete information.

How Do Reverse Mortgages Work? Once the property is sold-and this can be during the homeowner's lifetime or after his or her death-the sale price of the property pays back the loan. This rule is in place even if the sale price is less than the combination of the loan and interest (referred to as a short sale). Because reverse mortgages are backed by HUD, if there is a short sale HUD will pay the difference. Lenders cannot-by lawgo after the homeowner's other assets or the estate, so there's no need to worry that your children will have to pay the difference from their inheritance. HUD offers five options for receiving your payments: 1. 2. 3. 4. 5. Tenure - equal monthly payments, as long as at least one borrower lives and continues to occupy the property as a principal residence. Term - equal monthly payments for a fixed period of months selected. Line of Credit- unscheduled payments or installments, at times and in amounts of your choosing, until the line of credit is exhausted. Modified Tenure - a combination of line of credit plus monthly payments, for as long as you remain in the home. Modified Term - a combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

What are the Advantages of a Reverse Mortgage?

Homeowners can pull needed cash from the equity of the home, without incurring monthly expenses. Lenders cannot force homeowners to sell the property to pay back the loan. Reverse mortgages guarantee that the homeowner can stay on the property for as long as he or she lives, even if the outstanding loan and interest grow to exceed the value property's value.

What are the Disadvantages of a Reverse Mortgage?

A reverse mortgage can cost thousands more than a conventional mortgage. Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. Because HUD is the program administrator, all fees are fixed. Unfortunately, you may be approached by financial advisors who want to charge you for advice about reverse mortgages or sell you a reverse mortgage. All the information you need about reverse mortgages can be found online from HUD or AARP. Do not apply for a reverse mortgage from any company that is not approved by HUD.

It's important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially owns your home. Get sound advice. Discuss your reverse mortgage plans with legal and financial advisors, and family members, before making a decision. Because home ownership is often a person's most valuable asset, getting a reverse mortgage is essentially the same as spending the money you'd expect to leave to your heirs. Be sure that the older homeowner is thinking clearly when making this decision (no dementia or symptoms of Alzheimer's) because having a sudden influx of cash can be a heady experience and it would be a shame to waste it or become the victim of a scam. Reverse mortgages are often seen as a last resort if the homeowner needs cash and there are no other options.

What are the Rules of Reverse Mortgages?

To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property's full value. Age is an advantage when applying for a reverse mortgage. Borrowers must be at least age 62, and the older the homeowner is, the more money he or she would qualify for. For example, a 78-year-old borrower would qualify for a larger loan than a 62-year-old.

What are the Limits on Reverse Mortgages? The HUD limit on reverse mortgages is $625,000. If you are considering a reverse mortgage, it's important to get as much information as you can, and to consider all of your options. For many older homeowners, selling your home and moving to a less expensive home is the best way to protect your assets for yourself and your family.