Reverse Mortgage Info for Seniors
What is a reverse mortgage?
It is similar to a home loan but instead of making payments to the lender, the lender makes payments to you. Reverse mortgages are available to homeowners 62 years old and older with significant home equity, according to the NRMLA. “They are designed to enable retirees to borrow against the equity in their homes without having to make monthly payments as is required with a traditional “forward” mortgage or home-equity loan. Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells, or passes away. Borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home.
The amount you can borrow depends on many things including your home's value, your age, the outstanding balance on your mortgage loan (if you have one), the going interest rate at the time you take out the reverse mortgage, etc. As a general rule, the older you are, the lower interest rates are and the higher your home's value, so the more you can borrow. - There are a number of ways you can take the moneys:
You don't have to repay the loan until you die or move out of your house. If the value of the home declines and is not enough to cover the amount you've borrowed plus interest, that's the lender's problem.Neither you nor your heirs are responsible for anything beyond the house-sale proceeds; however, you will not be leaving the “full” value of your home to your heirs (your, the borrower is not necessarily giving up “all” the equity in your home with this product - it depends on the size of the loan relative to the value of the home and how long you stay in your home after you take out the reverse mortgage.
The amount you can borrow depends on many things including your home's value, your age, the outstanding balance on your mortgage loan (if you have one), the going interest rate at the time you take out the reverse mortgage, etc. As a general rule, the older you are, the lower interest rates are and the higher your home's value, so the more you can borrow. - There are a number of ways you can take the moneys:
- As a line of credit
- In a lump sum
- In monthly payments for the rest of your life
You don't have to repay the loan until you die or move out of your house. If the value of the home declines and is not enough to cover the amount you've borrowed plus interest, that's the lender's problem.Neither you nor your heirs are responsible for anything beyond the house-sale proceeds; however, you will not be leaving the “full” value of your home to your heirs (your, the borrower is not necessarily giving up “all” the equity in your home with this product - it depends on the size of the loan relative to the value of the home and how long you stay in your home after you take out the reverse mortgage.
- You must be at least 62 years old to obtain a reverse mortgage.
- The older you are, the more cash you can get.
There are some down sides to taking out a reverse mortgage
- The costs of taking out a loan can be substantial, but are usually linked to the size of the reverse mortgage loan and not the value of your home.
- You will not be leaving the value in your home to your heirs.
- Lenders will only finance a portion of your home's value.
New Math on Reverse Mortgages
From the Wall Street Journal as written by Robert Powell
(read the full article here: http://www.wsj.com/articles/new-math-on-reverse-mortgages-1458525888)
One important change, the Reverse Mortgage Stabilization Act of 2013, prevents homeowners in most cases from taking all their equity at once—roughly 40% of the total amount that can be borrowed is unavailable until a year after the initial loan. Other recently enacted regulations require homeowners to demonstrate they are able and willing to pay their property taxes and home insurance. And there are new protections for the non-borrowing spouse.
Here’s a look at some of the reverse-mortgage strategies financial planners suggest:
Taking a lump sum. Borrowing enough of the equity in a house in a lump sum to pay off an existing mortgage is one of the most frequent uses of a reverse mortgage, says Prof. Moulton. More than 60% of reverse-mortgage borrowers have used the proceeds for this purpose, according to her research. “This actually may be a pretty smart strategy,” she says.
Prof. Moulton cites a recent report by Harvard University’s Joint Center for Housing Studies that found that nearly 40% of seniors age 65 and older carry a mortgage today, a rate that has more than doubled since 1992. “Using a reverse mortgage to pay off a forward mortgage frees up monthly cash flow to a household,” she says. “Essentially it has the same effect on a household budget as receiving a monthly annuity payment.”
Opening a line of credit. Increasingly, advisers are suggesting that homeowners establish a line of credit through the HECM program whether they need the money immediately or not, because it can be used in several ways, as the need arises, to protect savings or even increase income in retirement.
A line of credit makes more sense than borrowing a lump sum and keeping it in reserve, says John Salter, an associate professor at Texas Tech University who has co-written papers with Mr. Evensky on reverse mortgages. That’s because, due to the intricacies of reverse-mortgage terms, the unused portion of a line of credit grows over the years, giving the homeowner access to more cash.
Taking benefits, Ms. Giordano says. After you apply for Social Security, you can stop taking money from the line of credit and, if you want, pay the loan back.
Because income from a reverse mortgage isn’t taxed, experts say an HECM line of credit can also be used—in place of taxable withdrawals from retirement accounts—to avoid tax-bracket creep, as well as the higher Medicare Part B and Part D premiums that can result from higher incomes.
(read the full article here: http://www.wsj.com/articles/new-math-on-reverse-mortgages-1458525888)
One important change, the Reverse Mortgage Stabilization Act of 2013, prevents homeowners in most cases from taking all their equity at once—roughly 40% of the total amount that can be borrowed is unavailable until a year after the initial loan. Other recently enacted regulations require homeowners to demonstrate they are able and willing to pay their property taxes and home insurance. And there are new protections for the non-borrowing spouse.
Here’s a look at some of the reverse-mortgage strategies financial planners suggest:
Taking a lump sum. Borrowing enough of the equity in a house in a lump sum to pay off an existing mortgage is one of the most frequent uses of a reverse mortgage, says Prof. Moulton. More than 60% of reverse-mortgage borrowers have used the proceeds for this purpose, according to her research. “This actually may be a pretty smart strategy,” she says.
Prof. Moulton cites a recent report by Harvard University’s Joint Center for Housing Studies that found that nearly 40% of seniors age 65 and older carry a mortgage today, a rate that has more than doubled since 1992. “Using a reverse mortgage to pay off a forward mortgage frees up monthly cash flow to a household,” she says. “Essentially it has the same effect on a household budget as receiving a monthly annuity payment.”
Opening a line of credit. Increasingly, advisers are suggesting that homeowners establish a line of credit through the HECM program whether they need the money immediately or not, because it can be used in several ways, as the need arises, to protect savings or even increase income in retirement.
A line of credit makes more sense than borrowing a lump sum and keeping it in reserve, says John Salter, an associate professor at Texas Tech University who has co-written papers with Mr. Evensky on reverse mortgages. That’s because, due to the intricacies of reverse-mortgage terms, the unused portion of a line of credit grows over the years, giving the homeowner access to more cash.
Taking benefits, Ms. Giordano says. After you apply for Social Security, you can stop taking money from the line of credit and, if you want, pay the loan back.
Because income from a reverse mortgage isn’t taxed, experts say an HECM line of credit can also be used—in place of taxable withdrawals from retirement accounts—to avoid tax-bracket creep, as well as the higher Medicare Part B and Part D premiums that can result from higher incomes.
More Information on Reverse Mortgages
- Reverse mortgages are so-called rising-debt, falling-equity loans, meaning that as debt increases, home equity falls. Lenders recoup this debt -- the accumulated principal and interest payments -- when the home is sold. The debt can never exceed the value of the home, and any remaining equity returns to the homeowner, the estate or heirs.
- Roughly 90% of all reverse mortgages are insured by the government through a so-called Home Equity Conversion Mortgage, or HECM. Those mortgages cannot exceed a certain amount, regardless of how much the house is worth. The remainder is not insured by the government. These are typically "jumbo" reverse mortgages tied to pricier homes, and they generally provide greater income, though at higher costs.
- Lenders currently charge an origination fee of up to 2% of the home's value, not the smaller loan amount. A mandatory mortgage-insurance premium adds another 2%. Borrowers also pay various closing costs typical of a traditional loan. Thus, the upfront costs on reverse mortgage can exceed $12,000 for a $250,000 home. Pricier houses can mean combined fees that are even higher. Borrowers also pay monthly charges that can add thousands more over the life of a reverse mortgage.
- Reverse mortgages put a bundle of cash into a consumer's hands, marking an enticing target for financial-product sellers to exploit. California, which originates more reverse mortgages than any other state, recently passed a law that, among other things, specifically bans mortgage lenders from pitching an annuity to consumers as part of the mortgage process.
- The older you are, the more cash you can get. How much a homeowner ultimately receives in a reverse mortgage is based on a person's age, the location and value of a home and prevailing interest rates. The older the borrower and the lower the rates, the larger the income.
- Jumbo mortgages, which have no limit, provide greater income to owners of higher-value homes, regardless of the home's geographic location. The catch: These mortgages come with interest rates that can be as much as two percentage points higher.
- Regardless of a home's worth, lenders will finance only a portion of its value. As an example a 68-year-old homeowner with a $1 million house could get a jumbo reverse mortgage of about $386,000. At age 72, a homeowner with the same $1 million house would get about $434,000 through a jumbo mortgage. At 80, the value jumps to $494,000.