Reverse Mortgage


Reverse home mortgage is a special type of private home loan for special type of people, the elderly senior citizens of America. This loan enables seniors to take advantage of the equity accumulated in their homes into cash, thereby reducing their monetary dependence on near ones. Reverse home mortgage enables senior citizens to access the equity in their homes into tax-free income, without the hassles of a monthly payment schedule. This type of loan is meant primarily for senior citizens to enable them to lead a dignified life without financial problems. The income from a reverse mortgage apart from being tax-free also does not affect Social Security payments or Medicare benefits. Furthermore the lender does not take ownership of your home, you retain the title to your home when you have availed of reverse mortgage. If you pay your property taxes and insurance diligently then the lender cannot foreclose on you. Payment can be had by different methods such as a one time lump sum, or regular monthly amount, or as a credit line account.

A 76-year old widow in Oakland, California has a home worth $1,000,000 with a current mortgage balance of $218,000. She needed money to make some repairs in the house, the expense of which could not be covered by her Social Security payment. A reverse mortgage paid off the $218,000 mortgage balance, and put $39,000 in her kitty at close of escrow, which she used for repairs. A credit line was created for the amount of $81,000 that will appreciate at 5% per year rate.

Conditions for a Reverse Home Mortgage :

  • The senior citizen applicant must be at least 62 year old.
  • You must own and reside in your home for the period of the loan.
  • Your home must be a single-family residence, or a building with 1-4 units, a condo or mobile home (the land on which it is built must belong to you). Co-operatives do not qualify for a reverse mortgage except in some regions of New York and Los Angeles.
  • Before embarking on a reverse mortgage, you must avail of free financial counseling from a source approved by the Department of Housing and Urban Development (HUD).

Benefits of a Reverse Home Mortgage :

  • The ownership of your home resides with you during the term of the loan and the remaining equity will be passed on to your heirs.
  • The income from reverse mortgage is tax-free and can be used for at-home care, hospital health care, home repair or improvements, helping your children or funding your grand-children's education, paying off taxes and credit card debts, buying a second home and also travel or simply to indulge your unfulfilled dreams.
  • No loan repayment hassles as long as you live in your home.
  • No income proof, credit ratings, or educational background required.

Loan Amount sanctioned is Determined by these Factors :

  • The total worth of the home after appraisal, minus repairs and the existing mortgage.
  • Age of the applicant, the more advanced in age attract larger loans. According to the HUD/FHA amortization calculator, the difference of the senior's age from 100 is used to divide the maximum loan amount.
  • The US Treasury 10-year T-bill or the LIBOR index determines the interest rate.
  • Location of the property.

All these factors determine the Total Annual Lending Cost (TALC) as stated by the US Federal Government Regulation 2.

Types of Reverse Home Mortgages :

There are three main types of reverse home mortgages with similar terms and qualifying conditions, only the loan amount sanctioned and interest rates differ. Further Reverse Mortgages are either Federally insured reverse mortgages, Government sponsored or Private reverse mortgages.

  • Home Equity Conversion Mortgage (HECM) : Home Equity Conversion mortgage is Federally insured by the US Department of Housing and Urban Development (HUD) and accounts for 90% of all reverse mortgages undertaken in the US. The maximum loan amount that can be made is $362,790. This type of mortgage can meet any financial need.
  • Fannie Mae Home Keeper Reverse Mortgage : Fannie Mae Home Keeper Reverse Mortgage is a Government sponsored reverse mortgage. It is mainly used to purchase a new home, it enables senior citizens to move to a new location either near their children or simply a change of place.
  • Cash Account : Cash Account is a proprietary offering from Financial Freedom, a private lending agency of reverse mortgages. This type of reverse mortgage is for seniors residing in high-priced homes and is not available in all states. Cash accounts have three categories, the Standard, Zero Point and Simply Zero.

Expenditure and costs incurred on a Reverse mortgage :

The Government of the United States regulates all fees payable on a Reverse home mortgage.

  • Mortgage Insurance Premium (MIP) payable to FHA : MIP assures that in the event of your passing the balance on the loan will never go above the total worth of your home. The amount payable as insurance is fixed at 2% of lending limit of your county.
  • Loan origination fees : Loan origination fees amount is due to the mortgage broker and loan officer that aids you to obtain a reverse mortgage. This amount is also 2% of the lending limit of your county.
  • Closing Costs : Closing Costs amount usually comes to $3000 and covers title policy, title insurance, appraisal and termite inspection costs, document preparation costs, notary fees, flood certification, and credit report.

Once the loan is passed, payment can be taken in any form:

Tenure: Tenure is available as equal monthly installments as long as the borrower resides in the house.

Term: Available as fixed monthly payments for a fixed period of time.

Credit Line: Credit Line type of payment is not scheduled and can be taken as need arises.

Modified Tenure: Modified Tenure combines credit line with monthly payments as long as the borrower resides in the house.

Modified term: Modified term is a combination line of credit with monthly payment for a fixed period chosen by the borrower.

Loan Repayment :

In a reverse home mortgage no loan payments are made for the term of the reverse mortgage loan. As such the loan balance increases over the years. In most locations the equity in the house appreciates at a faster rate than the loan balance. Thus the total worth of the house increases. If the borrower passes away or decides to sell the house the loan becomes due. If the borrower sells the house the reverse mortgage loan is paid off with the sale proceeds and he keeps the remaining equity. In the event of death of the borrower, the heirs have up to a year to sell the house and pay off the reverse mortgage or refinance the house. In case they sell after loan repayment the heirs share the remaining amount.

Case study : In April 2006 in California a 78-year old single man applied and gained a reverse home mortgage loan. The total worth of his home after appraisal was put at $550,000 and the loan balance after close of escrow was $244,192. Equity at the beginning of the loan was $305,808. At a calculated 8% appreciation, after 5 years the worth of the home is $808,130 and the loan balance will be $346,275 at 6.27% interest rate. Remaining equity after 5 years is $461,856.

With the help of reverse mortgage the senior citizen can take care of his expenses and other monetary needs. The heirs are secure in the increasing equity of the home.