Until recently, seniors 62 years of age and older have not had the best of choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity. Obviously, this meant moving into a new home or taking on monthly repayments—not exactly the most appealing choices for those who have put down permanent roots.
Take for example Doug and Sharon Jones, a couple in their late 60’s who have called their place home for over 30 years. After nearly 15 years of enhancements and home improvements, Mr. and Mrs. Jones are looking forward to spending the rest of their lives in that house, and being uprooted is the last thing they want.
Now, with all of their financial investments behind them, Doug and Sharon have decided they would like to spend some time traveling. They are also interested in finding a way to generate extra income in order to supplement their retirement and pay for the cost of prescription medications.
With reverse mortgages coming on the scene, Mr. and Mrs. Jones now have some appealing cash-flow alternatives they didn’t have before. These reverse mortgage loan plans will allow Mr. and Mrs. Jones to convert their home equity into tax-free income, without having to sell their current home.
For seniors and maturing baby boomers, the idea of staying put while collecting monthly advances can be very attractive. Many of them have no desire to relocate. Instead, they prefer cash advances to pay off debts, improve and repair their homes, or travel the world.
In addition, not having to pay the debt until a future time makes reverse mortgages an ideal option for those in their golden years.
* We strongly recommend consulting your tax advisor when choosing a reverse mortgage plan.
* For a glossary of common reverse mortgage terms, click here.
In order to apply for a reverse mortgage you must be 62 years of age or older. All owners who are on the title deed must meet this age requirement, as well as apply for and sign the loan agreements. Lastly, the home must remain the applicant’s’ principal place of residence.
One of the most attractive benefits of a reverse mortgage is there are no income or medical requirements to meet in order to qualify for eligibility and receive the money. Single family residences are most commonly eligible for reverse mortgages, although some programs do accept other types of properties, such as manufactured houses and condominiums. The only exception would be mobile homes and co-ops, which generally do not qualify for reverse mortgages.
In order to ensure that homeowners are fully aware of the financial ramifications of obtaining a reverse mortgage, the applicant must undergo counseling with an unbiased third party before completing a loan. AARP and HUD oversee a network of counselors who can provide this service, and it should be offered for a nominal fee or at no charge.
We specialize in developing loan programs for mature borrowers. Our staff is dedicated to helping you obtain the reverse mortgage plan that will be most valuable for your golden years. Give us a call now at 877-734-9848 to get started!
Reverse mortgages are probably best understood when compared side-by-side with a traditional home mortgage, otherwise known as a “forward” mortgage. The following table shows the differences between the two mortgages:
As you can see, both loans incur debt against your home and both affect equity, but they do so in very different ways. For a traditional home mortgage, you would be making monthly payments to a lender. With a reverse mortgage, they will make the payments to you. In essence, the two loans work completely opposite of each other.
There are 3 main types of reverse mortgage options, explained in detail below:
Home Equity Conversion Mortgages, also known as HECMs, are the most popular reverse mortgage option for retirees.
HECMs, although more expensive than single purpose reverse mortgages, give retirees the freedom to spend their money how they choose with few restrictions. Want to go on a dream vacation? Interested in taking up a new hobby? Want to have more income to spend with family and friends? With an HECM, you can do this.
HECMs are also federally insured, and although this will cost you more money than a single purpose reverse mortgage, you can rest assured that your lender will honor the loan agreement throughout the duration of your reverse mortgage.
With an HECM, a mandatory counseling session is required to ensure that potential borrowers understand their options as well as the advantages and risks associated with reverse mortgages. This can be quite beneficial for potential applicants, preventing poor financial decisions.
When it comes to transparency, HECMs are tough to beat. HECMs are standardized and widely available, which makes comparing rates easy and convenient. Additionally, with HECMs, unlike other reverse mortgage options, the non-borrowing spouse is protected from eviction if the borrowing spouse dies.
Some drawbacks of HECMs include:
Also known as jumbo reverse mortgages, proprietary reverse mortgages are reverse mortgages offered through private companies. Making up a small amount of reverse mortgages, proprietary reverse mortgages are private loans backed solely by the companies that offer them. An advantage of a proprietary reverse mortgage is the ability to get a bigger loan advance if you have a higher-valued home. As a result, if you have a home with a high appraised value and you have a small mortgage, there is a good probability you will qualify for additional funds.
Because they are not federally insured, proprietary reverse mortgages give lenders a substantial amount of freedom and allow them to establish their own terms. As a result, proprietary reverse mortgages are ideal for houses worth more than $625,000. While HECMs are limited to the lesser of the home’s appraised value, or $625,000, proprietary reverse mortgages are limited to whatever risk the lender is willing to endure. Similar to HECMs, proprietary reverse mortgages will still be based on the home’s appraised value, but unlike HECMs, this can be in the millions.
If you are over the age of 62, and your home is worth more than $625,000, you may want to consider a proprietary reverse mortgage. Although in many respects, this type of reverse mortgage seems more ideal than HECMs, they often have higher interest rates and give less relative to the home’s worth, making up for the lack of mortgage insurance.
Other benefits of this proprietary reverse mortgages include the freedom to spend the money from the loan on anything you choose with:
Of course it is important to be aware of the risk as well, and due to its lack of regulations, there is more risk when getting a proprietary reverse mortgage. Additionally, proprietary loans may have less non-borrowing spouse protections.
Often referred to as property tax deferral programs, single purpose reverse mortgages make up a small percentage of reverse mortgages. Made available through non-profit organizations as well as local and state government agencies, single purpose reverse mortgages allow seniors over the age of 62 to retrieve equity from their primary residence for a specific, lender-approved reason.
Also important to take into account, single purpose reverse mortgages are not federally insured, unlike other types of reverse mortgages. This can save you a substantial amount of money as federal insurance represents greater than half of closing costs on other reverse mortgage options. When factoring in and incorporating other insurance premiums, this amount can total thousands of dollars over your mortgage’s lifetime.
Although common sense would lead many to believe having a lack of insurance would make single purpose reverse mortgages a riskier option, it does not hold true in this scenario. This is because federal mortgage insurance is designed to help the lenders, not the borrowers, and the resulting lack of insurance for single purpose reverse mortgages is a risk for the lender.
The major benefit of single purpose reverse mortgages are the lower interest rates and fees. Comparatively to other types of reverse mortgages, single purpose reverse mortgages are by far the least expensive.
Although they are the cheapest reverse mortgages available, they come with a multitude of restrictions. As the name suggests, single purpose reverse mortgages can only be used for a specific purpose, such as home repairs, home improvements, property taxes, or some other stated purpose. As a result, what you can do with your money is limited. Additionally, in order to qualify for a single purpose reverse mortgage, you typically need to have a low or moderate income.
When getting a reverse mortgage, there are two different options available to borrowers: fixed rates and variable rates
With a fixed rate, the rate of your reverse mortgage stays the same from start to finish. This number is normally determined by various investors and government agencies whose jobs are to keep the rates stable.
Fixed mortgages are best if you plan on using all of your reverse mortgage funds all at once—such as to pay off an existing mortgage or costly home repairs.
Variable interest rates have two aspects to them—an index and a margin.
Benefits of variable interest rates
Disadvantages of variable interest rates
Variable rates are ideal if you plan on using the funds of your reverse mortgage over time rather than all at once. With this plan, you would use your reverse mortgage funds to add to your existing income, to supplement other income streams, or to use in case of emergency.
One of the best perks regarding reverse mortgages is the different things you can do with the extra source of income. If you love to travel, acquiring a reverse mortgage can open up opportunities to get on the road, see beautiful places, and spend quality time with loved ones.
One viable option is to use the money from your reverse mortgage to purchase a dream vacation home. With a reverse mortgage, as long as your home is your primary residence, you will not be needing to make any payments on your house. As a result, you can invest in a dream home in a beautiful location, creating the perfect getaway spot to enjoy with your spouse or extended family.
If you would prefer not to invest in another home, but would still like to travel, you can use the money from your reverse mortgage to travel to beautiful destinations all around the country or the world.
Often times in life, we experience health complications when we least expect it, racking up medical bills, leading to crippling debt. In many of these instances, we get stuck and do not have a way to pay, which can lead to increased stress and worry regarding our future.
In many cases, reverse mortgages can be a lifesaver, giving us a source of income when we need it most. If you have high medical bills or require healthcare services, getting a reverse mortgage can be a solution. When considering getting a reverse mortgage to pay for medical bills, it is important to keep in mind that in order to keep your reverse mortgage, your home must be your primary residence.
If you require hospitalization for over 12 months, you will be required to pay back your loan. You are able to receive medical care in a healthcare setting for up to 12 months and still keep your reverse mortgage. Another option is to receive in-home medical care, allowing you to receive the care you need while still residing within your home.
Another benefit of receiving a reverse mortgage is additional income to allow for payment for prescription drugs. A reverse mortgage can provide the money needed to cover these increased expenses.
As you enter retirement, having an extra source of income can mean a world of difference. Whether it is pay for an expensive hobby, home upgrades, your children’s (or parents’) bills, or activities involving your grandchildren, you may incur unanticipated expenses. As a result, a reverse mortgage can give you the funds you need to live life comfortably.
One of the best ways to ensure financial security as you retire is to purchase an annuity. Annuities, (although coming with a series of risks that should be taken into consideration before purchasing), can provide a steady stream of income. Considered by many financial planners to be a great investment tool, many retirees have reaped the benefits of annuities. By getting a reverse mortgage, you can receive an income stream that will allow you to invest, providing a steady stream of income during retirement.
In an increasingly competitive and global world, education is becoming more important than ever. The average college student in 2016 enters the marketplace with over $37,000 in student loan debt. If you have grandchildren, you may want to help them get started in life by helping them with their debt, but are struggling to find a way to do so. By getting a reverse mortgage, you will be able to acquire the finances you need to provide assistance. There are few things in life more beautiful than seeing the ones we love succeed. With a reverse mortgage, you can have the means to do just that.
Once we determine that a reverse mortgage is right for you, we will then decide which type would best suit your financial needs. This is step two in our action plan of providing you with the right mortgage. Call us now to get started!
Reverse Mortgages do not require any payment as long as the borrower(s) remains in the home, pays the taxes and insurance, and keeps the home maintained. This is another valuable benefit for those considering a reverse mortgage.
The loan fees and costs incurred in obtaining a reverse mortgage can typically be offset by the money received from the loan. These costs will be added to the balance of the loan and must be repaid with interest once the loan terminates. Please note that counseling and appraisal costs must be paid out of pocket.
In order for borrowers to gain a better understanding of the true cost of reverse mortgages, the federal Truth in Lending Act (TILA) law requires lenders to disclose what they call a “Total Annual Loan Cost” for the loan, also known as TALC. TALC displays the total transaction cost over the life of the loan. This makes seniors fully aware of the cost of incurred by the loan. The TALC is also extremely helpful when comparing various types of reverse mortgages.
Reverse mortgage debt is determined by adding all of the loan advances. This includes those used to pay off prior debt or finance the loan costs, plus the interest on your loan balance. In the end, if that total amount equals less than the value of your home when you repay the loan, you will end up keeping the remaining amount.
Should the balance of your loan ever grow to equal or exceed what your home is worth, your total debt will be limited by that value; you can never be required to repay more than what your home is worth when the loan comes due. That simply means if today’s lofty housing prices start to decline, you won’t be responsible for paying back a larger amount.
Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) become deceased, sell the home, or relocate, the loan will be due in full, along with interest and any additional costs. In the event there are two borrowers on the loan and one should pass away, the loan would not yet be due since one of the borrowers still occupies the house.
Although reverse loans are not due until one of the above-listed criteria changes, they may be repaid at any point without incurring penalties or additional fees.
The amount of money you receive from a reverse mortgage will depend on several things, including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are, the more equity you will have in your home. This is why more mature borrowers typically receive greater loan amounts.
There are several ways that you can receive money from a reverse mortgage. Some programs may even allow you to combine the choices.
There are many different ways you receive payments from your reverse mortgage. With all the different options it can be hard to decide which one is best. Listed below are the 6 most common payment options when getting an HECM reverse mortgage:
If you decide to get a fixed rate payment plan, you only have one payment option—a single disbursement lump-sum payment. With this payment option, you receive all money from your reverse mortgage in one large payment after closing. Although you can expect to have a lower interest rate over the duration of the reverse mortgage, with a single lump-sum payment, the initial interest rate is higher than an adjustable-rate loan. Additionally, you are only able to receive 60% of your home’s value in cash, while the remaining 40% remains as home equity.
**Main takeaway**—You get all all your money at once with a fixed rate for the duration of the reverse mortgage.
With this adjustable-rate payment plan, you will receive consistent, equal monthly payments for the duration of your life, so long as the home is your primary residence. Monthly payments for the tenure plan is calculated under the assumption that you will live until 100 years old. For example, if you are 65, the equity in your home will be divided up to give you equal monthly payments for the next 35 years. If you do end up living to be more than 100 years of age, you will continue receiving monthly payments.
**Main takeaway**—Equal monthly payments will continue as long as at least one borrower is living and continues to occupy the property as a principal residence.
Another adjustable-rate payment plan, the term payment plan, allows you to receive payments every month for a specified period of time. For example, if planning to move in 5 years to a new home in a different location, a retiree may consider a tenure plan, in order to receive even monthly payments over the course of those 5 years, before moving.
**Main takeaway**—Equal monthly payments will be paid for the fixed period of months you have selected.
The line of credit option is a variable-rate payment option that allows you to access your money as you need it. With this payment option, you can take out as much money as you need, as long as you remain under the principal limit. When it comes to flexibility, it is tough to beat this type of payment plan.
**Main takeaway**—This would be used in the same way as a credit card or checkbook. You would receive unscheduled payments or installments at the times and amounts you have selected. This will continue until the line of credit is exhausted.
With this variable payment plan, you get fixed monthly payments for the duration of your life in combination with a line of credit, essentially combining a tenure plan with a line of credit plan. Monthly payments will be less than a regular tenure plan, and the line of credit will be smaller than a straight line of credit plan. However, the total amount of funds available will be the same.
**Main takeaway**—You will have a combination of a line of credit and monthly payments for as long as you continue to live in the home.
The modified term plan, also a variable payment plan, combines a term plan with a line of credit. Retirees who choose a modified term plan choose a fixed monthly payment for a specified number of months, in combination with being given access to a line of credit. Like a modified tenure plan, the monthly payments will be less than a straight term plan and the line of credit will be less than a straight line of credit plan. However, the total amount of funds gained from a modified term plan will be the same.
**Main takeaway**—This combination of a credit line and monthly payments differs from the plan above in that it is based upon a fixed period of months that you have chosen.
Our loan specialists will help you select a plan that will be most beneficial to your financial needs. Call us now to discuss your options!
Most homeowners generally choose reverse mortgages so that they can remain in their current homes. The best way to decide if a reverse mortgage is for you is to compare it to the alternative of selling your house. When you make this evaluation, ask yourself these three questions:
We will help you fully understand the benefits of staying in your current home. Perhaps you’ll confirm what you knew all along—that the best place to be is right where you are .Give us a call now at 877-709-6420.