Now is the Time to Finance With a Reverse Mortgage!

A reverse mortgage is a great financial solution for homeowners who are seeking ways to keep their home, pay all their expenses and still maintain their financial independence. Now is the best time for homeowners to take advantage of this type of financing. Soon, certain changes will take place within the reverse mortgage program that will likely affect future applicants.

Current Administration Requests HECM Subsidy

Home equity conversion mortgages (HECMs), which are the most common type of reverse mortgage, have been successful in helping homeowners find a way out of financial predicaments. The program offers several advantages, but to continue offering these home loans and their benefits, the program needs money. The office of Management and Budget requested a $250 million subsidy for the HECM program in the 2011 budget. If this subsidy is not approved, major changes will go into effect that will likely reduce the effectiveness of the home equity conversion mortgage.

The principal limit factors (or PLFs), which determine the amount of money a homeowner can receive from his or her loan based on age and interest rates, were already reduced at the beginning of this year. David H. Stevens, assistant secretary of Housing for the Federal Housing Administration, said that in order for the program to successfully continue in 2011, whether the subsidy is received or not, the annual mortgage premium will have to increase from 0.5% to 1.25% and the principal limit factors will have to be reduced at least another 1-5%, depending on the homeowner’s age.

What Does This Mean for HECMs?

If the $250 million subsidy is not granted, even more changes will have to take place. Without the necessary money, the principal limit factors would have to be reduced another 21% in 2011, which is unpleasant news for those in the process of obtaining reverse mortgages. Reducing the principal limit means seniors will receive significantly less money from their loan, specifically about 30% less, which equals about $23,000 to $27,000. Stevens fears that, if this change occurs, fewer homeowners will be able to take out these loans because there will not be enough to finance their homes.

Act Now to Reap the Benefits of this Loan

This type of financing is different than other home loans. Unlike most loans, homeowners do not have to pay a monthly mortgage payment. As long as the loan requirements are met, the homeowner will not owe anything on the loan until he or she no longer resides in the home. If there is sufficient equity in the home, the equity can be converted into cash that the homeowner can use for any expense. The amount the homeowner can receive depends on his or her age, home value and interest rates, and the homeowner can choose how his or her money is disbursed.

Stevens discussed how crucial the HECM program is because of the various financial setbacks seniors encounter today, including high medical bills and declines in income and savings. If all of these changes take place, it will eliminate this loan as a financial solution for many homeowners. Homeowners who want to enjoy the current benefits offered by this type of financing should speak with a loan specialist to learn more about their options.

Victoria Belle-Miller is the newest member of the Senior Reverse Mortgage writing staff. Her background in journalistic writing and ability to evaluate the issues that Americans face in daily life make her a strong addition to the team and a valuable source of sound mortgage advice.


Top 10 Things to Know

Reverse mortgages are becoming popular in America. HUD’s Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA’s HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.
3. Can I apply if I didn’t buy my present house with FHA mortgage insurance?
Yes. It doesn’t matter if you didn’t buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What’s the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
You don’t make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment.”
6. Can the lender take my home away if I outlive the loan?
No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current and maintains the property.
7. Will I still have an estate that I can leave to my heirs?
When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.
8. How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You can use an online calculator like the one on the AARP website to get an idea of what you may be able to borrow.
9. Should I use an estate planning service to find a reverse mortgage?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HECM housing counselors are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
10. How do I receive my payments?
You have five options:
• 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 – combination of line of credit with monthly payments for as long as you remain in the home.
• Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

The Best Way to Take Reverse Mortgage Proceeds

Home Equity Conversion Mortgages (HECMs), or reverse mortgages, can be structured in several ways–you can take a lump sum, monthly payments, a line of credit, or some combination of the three. Each choice has its implications; learn what to consider when you choose your reverse mortgage payout.

Reverse mortgages can help senior homeowners accomplish many different objectives. You can use them to replenish depleted retirement funds, start new businesses, enhance your lifestyle, provide economic security, avoid foreclosure, or even buy a new home. The way you choose to accept your funds depends on your purpose for the proceeds.

When You Need a Lump Sum

Lump-sum distributions may be appropriate for avoiding foreclosure, shoring up retirement funds, purchasing investment property, buying a new home, paying off existing medical bills or other one-time needs. Here’s how it works.

•Staving off foreclosure. If you have a lot of home equity, but insufficient income to pay your current mortgage, you may be able to use some of that equity to ease your burden. A reverse mortgage with a lump-sum disbursement can help you pay off your mortgage and allow you to keep your home.

•Increasing retirement savings. In recent years, your retirement investments may have suffered a severe blow as the Dow plunged from its record high of over 14,000 in January 2007 to less than half that by March 2009. If you had to withdraw money when the markets were down, you may not be able to make up any income losses without substantial new deposits into those accounts. If that’s the case, you should consider taking at least some of your reverse mortgage proceeds as a lump sum, so you can use the money as an income subsidy or re-invest it if market conditions are favorable for you to do so.

•Purchasing investment property. Since it’s your money, there are no restrictions on how you use the proceeds of your Home Equity Conversion Mortgage (HECM). Since you don’t need good credit or a healthy income to qualify for a HECM, it may be much easier to get money for purchasing rental property with a reverse mortgage than with an investment property loan. Just make sure that the property is a good enough investment to make it worth incurring the mortgage lenders’ fees and interest charges of an HECM.

•Buying a second home. Want a new home with no mortgage and some cash left over? Then consider the HECM for a home purchase. This is a good method to use if you are interested in “snowbirding,” where you have a northern home for summer months and a winter condo in a warm, sunny location (or vise versa). If you have sufficient equity, using an HECM can allow you to pay cash for that second home and have no mortgage payments to worry about. If the equity stake in your existing home is deep enough, you can even draw a pool of additional cash out and stash it in a bank account to cover taxes and any maintenance expenses, annual travel expenses, or other practical uses.

When Regular Monthly Disbursements Are Best

Reverse mortgage lump sum payments can affect your eligibility for certain government programs, including Medicaid. Generally, money you get from your HECM isn’t counted as income as long it’s spent within the same month it’s received. If you don’t spend it all, however, it could push your asset totals beyond the allowable limits for Medicaid or SSI eligibility. Ask your reverse mortgage counselor or consult with a lawyer who specializes in elder care if you are concerned about eligibility for state or federal benefits. In addition, monthly disbursements are a better idea if you don’t plan to spend all of your proceeds at once, because you only accrue interest on what has been disbursed. Your monthly payments can be used to supplement your lifestyle. You can opt to receive them for a set period (term) or for as long as you live in your home (tenure). The shorter the term, the higher the amount.

The Advantages of a Line of Credit

An HECM structured as a line of credit can be used on its own or added to any other payout option — for example, you could take smaller monthly payments and have the line available in case of emergency. A credit line can also be used to start a new business if you get tired of retirement, to fund college tuition for a relative, or for an annual vacation. The beauty of the line of credit is that you only pay for what you use, and it can even grow over time as your property appreciates.

HECMs Offer Custom Solutions

The way you choose to take your money depends on your needs and financial situation. HUD reverse mortgage counseling, which is required before you take out your HECM, can help you sort them out and choose your best option.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.


Some retirees use reverse mortgages to pay for affluent lifestyle

What many people have now — house, lifestyle, neighborhood, friends, church, club — is exactly what they’d like to keep.

Unfortunately many older folks simply don’t know how or where to look to find the funds that would allow them to do so. The immediate need for seniors now is supplementing the income to provide the standard of living they desire.

In the past, the typical reverse mortgage was taken out by a single woman, age 75, who needed funds to fix up her home so she could comfortably age in place. But reverse mortgages are now also being used to support a more well-to-do routine.

For example, former Puget Sound-area residents Frank Williams, 77, and his wife, Carla, own 35 weeks of time shares each year in five different systems. They work points, bonus time and favored status like some people work airline miles. They know how to successfully maneuver through each different organization to gain the maximum overall benefit. They are now actively filling in their timeshare schedule into calendar year 2022.

That’s organization.

The Williamses took out a reverse mortgage on their principal residence in New Mexico not to buy more timeshare weeks, but to make sure they didn’t have to skimp getting to them or cut back on activities once they arrived.

“I know a lot of people are skeptical about reverse mortgages, but it worked for us,” Frank Williams said. “Our friends want to leave everything they have to their kids, and that’s OK. Our kids are doing fine, they own their own homes, and would rather see us enjoy the rest of our lives.”

Consumers can choose how to receive the money from a reverse mortgage. The options include a lump sum, fixed monthly payments (for life), a line of credit or a combination of the above. The most popular option — chosen by more than 60 percent of borrowers — is the line of credit, which allows consumers to draw on the loan proceeds at any time.

The size of the reverse mortgage depends on age at application, the loan type and home value. In general, the older the consumer and the more valuable the home (and the less amount owed), the larger the reverse mortgage.

A reverse mortgage can be viewed similar to a home equity loan but without a monthly payment. Owners do not repay the loan as long as the home remains the principal residence. Income and credit rating are not considered when qualifying for the loan. There is no requirement that owners requalify during the term of the reverse mortgage, but property taxes and home insurance must remain current.

With a home equity loan, borrowers must make regular payments to repay the loan. These payments begin as soon as the loan is originated. To qualify for such a loan, the borrower must earn a monthly income great enough to make those payments. If payments are not made, the lender can foreclose, forcing the sale of the home.

The Williamses took out a home equity loan to do a major remodel on their home. He repaid most of the debt by selling off some lackluster bonds, then paid off the remainder with a reverse mortgage from Golden Gateway Financial. The couple also receives $1,500 a month, tax free, for the next 20 years from funds remaining in the reverse mortgage.

“I had some assets that I didn’t really want to sell because I thought they would rebound and do quite well,” Frank Williams said. “So, I look at the reverse mortgage as a way of buying us some time for those assets to come back. The bonds that I did sell were not yielding anything close to the interest rate we were paying on the home equity loan, so I sold them and paid it down.”

In winter, the Williamses spend up to five consecutive weeks in the same timeshare unit on the Big Island of Hawaii. They then will hop over to Kauai for a couple of weeks and then maybe hit Palm Springs and San Diego before drifting back home to New Mexico. Northern Idaho is a favorite summer spot.

But why would they want to pay $22,000 to $23,000 in annual fees rather than simply plunk that down on a mortgage for a second home?

“I have no delusions about timesharing being a good investment. They’re a lousy investment,” Frank Williams said. “But we enjoy doing what we do, going where we go. We have no regrets and wouldn’t change anything.”