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Friday, August 1, 2014   
 

Reverse Mortgage Basics
by Ralph Splendorio
Ralph Splendorio is currently a Reverse Mortgage specialists for Mid Atlantic Capital. Mr. Splendorio has an MBA and worked in the past providing private financing for companies. You can reach him at rsplendorio@gmail.com with any questions.
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Ralph Splendorio

Reverse mortgages are becoming very popular. There are many questions and myths concerning this helpful financial tool. The purpose of this article is to provide a broad overview of reverse mortgages as well as examples of loans.

A reverse mortgage allows senior homeowners to turn some of their home ownership into tax-free income without selling their home. The borrowers maintain title and make no monthly mortgage payments as long as the borrower stays in the home. In fact, monthly payments often go to the borrower.

Reverse mortgages are not new. The Housing and Community Act of 1987 established a federal mortgage insurance program creating a market for these loans. The insurance program provides a safety valve that protects the public from financial loss. Reverse mortgages enable senior homeowners to convert the ownership value of their homes to monthly income or a line of credit. The insurance program ensures that the borrower, or heirs, will never pay more than the ownership value of the home.

The reverse mortgage is particularly valuable in high property tax states like New Jersey. Many people in their sixties have owned their home for many years. Their homes have increased in value much faster than either their income or wealth. Their property taxes and other expenses soon outpace their ability to pay. The reverse mortgage is one way for these people to maintain their homes and complete their lives there with dignity.

A reverse mortgage and a home equity loan both use the equity of the home to provide cash. The major difference is that your income has no effect on a reverse mortgage, where it may with a traditional mortgage. Another difference is reverse mortgages require no payments as long as you live in and maintain your home. This is not true with traditional mortgages.

The reverse mortgage does not come free. There are fees. Many of the fees are regulated and they are fully disclosed. Some fees provide the security of knowing you may never outlive the assets of your home. A reverse mortgage may not be for everyone, but it is good for many. A reverse mortgage is one option senior homeowners over 62 should consider as part of their financial planning. It may be a particularly good option for many who wish to eliminate non-recurring debt without selling their home or increasing monthly payments.

Here are some questions and answers concerning reverse mortgages. If you have questions concerning reverse mortgages, please feel free to contact me at rsplendorio@gmail.com.

WHAT ARE THE CHARACTERISTICS OF THE MORTGAGE?

Loans are paid according to a plan decided by the borrower (you).
No monthly payments are made. No payments are made until the home changes ownership or is no longer occupied and then the entire loan is paid off.
The borrower (you) will never owe more than the loan balance or the value of the home (property) whichever is less. No assets other than the home pay off the loan.

If the lender cannot pay the borrower, the Unites States Government agency will make all payments. This is part of the value of the insurance.

WHO IS ELIGIBLE FOR A REVERSE MORTGAGE?

You must be 62 years old or older.
Properties must be single unit dwellings, including condominiums.
The borrower should own their homes free of any mortgage or with liens not exceeding the amount of the amount of your equity.

HOW IS THE VALUE OF THE MORTGAGE DECIDED?

The loan amount is based on the age of the youngest borrower (for more than one borrower), the expected interest rate and the maximum claim amount. The home value is assessed. The age of the borrower affects the loan because the younger borrower will usually live longer than an older borrower. Higher interest rates result in smaller loans and lower interest rates result in higher loans. This is true for most mortgages. There are limits to the dollar amount of the reverse mortgage. HUD sets the limit and it will insure. The HUD limit is effectively the maximum reverse mortgage available. The value of the mortgage is most affected by the age of the borrower, interest rates and the equity value of the home.

HOW MAY THE MONEY BE USED?

The money from the mortgage can be used for any purpose. Many senior homeowners use it as a security blanket and as a way to stay in their homes and maintain their lifestyle. The money is not restricted to any specific purpose.

WHEN IS THE LOAN REPAID?

The borrower does not repay the loan until the last surviving borrower no longer lives in the home. Repayment of the loan, interest charges and fees occur when the borrower no longer uses the home. This will occur if the homeowner moves from the house permanently, sells the house or passes away.

WHAT ARE THE PAYMENT PLANS?

You may receive equal monthly payments for as long as you live in or occupy the home. This is similar to a mortgage, except you receive rather than pay money and there is no time limit to the payments as long as you occupy the home.
You may receive equal payments for a fixed period.
You may receive a line of credit that you may use as needed.
Combinations of the above.

HOW DO I KNOW MY HOME ASSETS ARE ALL I WILL NEED?

You pay a one-time, non-refundable percent (currently 2%) of the maximum loan amount at closing. The borrower also makes a monthly payment of a small percentage of the money received. This is currently one-half of one percent (0.5%). This fee pays into a fund that insures this.

HOW DO I KNOW I AM NOT BEING LIED TO?

You must receive counseling from a government approved housing counseling agency. The purpose of this counseling is to educate the borrower about the mortgage and their suitability to your needs and situation.

WILL I LOSE MY HOUSE?

Lenders secure reverse mortgages in the same way as a traditional mortgage. As long as you maintain your home, you need not make any payments until you leave the home. Since you do not make payments, there is no default or reason to take your home. Your insurance ensures you never owe more than your house is worth.

WILL I MAINTAIN TITLE?

You will have a lien on your home just as you would with any mortgage. There is no change in title.

EXAMPLE

  Age 63 Age 72
 Equity Value of Home $200,000 $200,000
Lump Sum or Credit Line $95,600 $113,600
Monthly Payment for Entire Life
(Assuming you stay in the home)
$580 $745

The examples here are only that, examples. This is not a formal offer based on any specific product offering. The examples provide an idea of what is possible. This example shows two payment options. There are others. Notice the amount you borrow is well below the value of the home. The amount available in a line of credit increases each year and your heirs may use the cash value to pay off the loan and the non-used portion does not affect your heirs. Please email me if you have specific questions. I will do my best to answer or get someone to answer your questions.

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