For
many seniors the equity in their home is their largest single
asset, yet it is unavailable to use unless they use a conventional
home-equity loan. But a conventional loan really doesn't
free up the equity because the money has to be paid back
with interest.
A reverse
mortgage is a risk-free way of tapping into home equity
without creating monthly payments and without requiring
the money to be paid back during a person's lifetime. Instead
of making payments the cash flow is reversed and the senior
receives payments from the bank. Thus the title "reverse
mortgage".
Many
seniors are finding they can use a reverse mortgage to pay
off an existing conventional mortgage, to create money for
a down payment for a second home or to pay off debt. Popularity
is skyrocketing. Over the last five years the number of
reverse mortgages nationwide has tripled. The uses of this
untapped wealth are only limited by a person's imagination.
For
those seniors who earn low incomes but own a home, a reverse
mortgage can allow them to remain in the home by creating
extra income. It can also allow for remodeling or repairs
and when the time comes to sell, the investment in the home
can make it more valuable.
False
Beliefs about Reverse Mortgages
“The
lender could take my house.” The homeowner retains
full ownership. The Reverse Mortgage is just like any other
mortgage; you own the title and the bank holds a lien. You
can pay it off anytime you like.
“I
can be thrown out of my own home.” Homeowners can
stay in the home as long as they live, with no payment requirement.
“I
could end up owing more than my house is worth.” The
homeowner can never owe more than the value of the home
at the time the loan is due.
“My
heirs will be against it.” Experience demonstrates
heirs are in favor of Reverse Mortgages.
Virtually
anyone can qualify. You must be at least 62, own and live
in, as a primary residence, a home [1-4 family residence,
condominium, co-op, permanent mobile home, or manufactured
home] in order to qualify for a reverse mortgage.
There
are no income, asset or credit requirements. It is the easiest
loan to qualify for.
A reverse
mortgage is similar to a conventional mortgage. As an example:
* The
bank does not own the home but owns a lien on the property
just as with any other mortgage
* You continue to hold title to the property as with any
other mortgage
* The bank has no recourse to demand payment from any family
member if there is not enough equity to cover paying off
the loan
* There is no penalty to pay off the mortgage early
* When the loan becomes due, you can refinance and keep
the house.
The
proceeds from a reverse mortgage are tax-free and can be
used for any legal purpose you wish:
* daily
living expenses
* home repairs and improvements
* medical bills and prescription drugs
* pay-off of existing debts
* education, travel
* long-term care and/or long-term care insurance
* financial and estate tax plans
* gifts and trusts
* to purchase life insurance
* or any other needs you may have.
The
amount of reverse mortgage benefit for which you may qualify,
will depend on
1.
your age at the time you apply for the loan,
2. the reverse mortgage program you choose,
3. the value of your home, current interest rates,
4. and for some products, where you live.
As a
general rule, the older you are and the greater your equity,
the larger the reverse mortgage benefit will be (up to certain
limits, in some cases). The reverse mortgage must pay off
any outstanding liens against your property before you can
withdraw additional funds.
The
loan is not due and payable until the borrower no longer
occupies the home as a principal residence (i.e. the borrower
sells, moves out permanently or passes away). At that time,
the balance of borrowed funds is due and payable, all additional
equity in the property belongs to the owners or their beneficiaries.
If the heirs want to keep the home with the additional equity,
they can refinance with a conventional loan.
There
are three reverse mortgage loan products available, the
FHA - HECM (Home Equity Conversion Mortgage), Fannie Mae
- HomeKeeper®, and the Cash Account programs. Over 90%
of all reverse mortgages are HECM contracts.
The
costs associated with getting a reverse mortgage are similar
to those with a conventional mortgage, such as the origination
fee, appraisal and inspection fees, title policy, mortgage
insurance and other normal closing costs. With a reverse
mortgage, all of these costs will be financed as part of
the mortgage prior to your withdrawal of additional funds.
You
must participate in an independent Credit Counseling session
with an FHA-approved counselor early in the application
process for a reverse mortgage. The counselor's job is to
educate you about all of your mortgage options. This counseling
session is at no cost to the borrower and can be done in
person or, more typically, over the telephone. After completing
this counseling, you will receive a Counseling Certificate
in the mail which must be included as part of the reverse
mortgage application.
You
can choose 3 options to receive the money from a reverse
mortgage:
1) all
at once (lump sum);
2) fixed
monthly payments (for up to life);
3) a
line of credit; or a combination of a line of credit and
monthly payments.
The
most popular option, chosen by more than 60 percent of borrowers,
is the line of credit, which allows you to draw on the loan
proceeds at any time. The line of credit also earns interest
which in essence is allowing the equity in the home to grow.
For example $120,000 in a line of credit earning 5% would
be worth almost $200,000 10 years from now.
Keeping
money in a reverse mortgage line of credit in most states
will not count as an asset for Medicaid eligibility as this
would be considered a loan and not a resource for Medicaid
spend down. In other words, keeping the money in the line
of credit will not disqualify you from becoming Medicaid
eligible.
However,
transferring the money to an investment or to a bank account
would represent an asset and would trigger a spend down
requirement and delay eligibility. Please note however that
distinguishing between what portion of reverse mortgage
proceeds might be counted as a loan and what portion as
an asset is not a simple black and white decision. It is
best to get an opinion from an elder attorney in your state.
If a
senior homeowner chooses to repay any portion of the interest
accruing against his borrowed funds, the payment of this
interest may be deductible (just as any mortgage interest
may be). A reverse mortgage loan will be available to a
senior homeowner to draw upon for as long as that person
lives in the home. And, in some cases, the lender increases
the total amount of the line of credit over time (unlike
a traditional Home Equity Line where the credit limit is
established at origination). If a senior homeowner stays
in the property until he or she dies, his or her estate
valuation will be reduced by the amount of the debt.
At the
death of the last borrower or the sale of the home, the
loan is repaid from equity in the home. Any remaining equity
(which is often the case) goes to the heirs.
Almost
all reverse mortgages are the HECM loan which is guaranteed
by FHA mortgage insurance. If there is not enough equity
to cover the loan, the insurance satisfies the loan by paying
the deficit. With a HECM loan, the bank will never come
after the heirs to satisfy the mortgage obligation.
This
article was provided by the National Elder Care Planning
Council as part of the "Elder Care Planning" series.
