Information regarding reverse mortgages

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    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, per HUD, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves. The owner can be out of the home for up to 364 consecutive days (i.e., into aged care).

    In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage has been paid in full and the property is released from the lender and becomes fully and solely owned by the homeowner. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.

    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.

    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. 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.

    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.

    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 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.

    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]

    The Housing and Economic Recovery Act of 2008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds—the so-called HECM for Purchase 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.

    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. 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. 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, 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.

    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 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.

    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.

    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. As of 2006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000. 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.]

    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.]

    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.

    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.
    What sixdogs has given you is the legal meaning and well worth reading.
    The short answer is you get a loan on you house depending on the equity you have. The lender will lend up to a certain pecentage of your equity.
    The loan is not repaid by installments, it is paid when the house is sold at sometime in the future. You may decide to sell and move out, the loan including accrude interest must be paid to the lender. If you die the same applies the loan plus interest must be paid before the estate is divided according to you will.

    Interest is either at a fixed rate or variable, you normaly have a choice of which one you choose.

    You make no payments as I said so each 6 months you get a statement telling how much you owe. It is important to realise you end up paying interest on all the accrued interest.

    This type of loan has a lot of potential for older couples whose children are in a good financial situation and the parents are not wishing to leave the house to the children free of debt.

    I will give you scenario. You borrow 40 thousand dollars at say 8% fixed for term of loan. After say 20 years your debt to the lender would be somewhere around $150 thousand. You die the house sells for $600 thousand. The lender get their $150thou, the rest,
    $450 thou goes to your estate. Same if you sell lender gets their share you get the rest.

    Some lenders have a "No loss clause" which means the amount owing NEVER exceeds the sale price of the house so whist you may not get any cash you do not have to pay out either.

    If you can get a fixed rate of around 8% you are pretty sweet as home prices increase, long term, by 10% in a normal market.

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