Reverse Mortgage and Reverse Mortgage Purchase

Reverse mortgages are becoming more
popular, but are they right for you?

IT'S THE LAW: Texas is the last state to approve the Reverse Mortgage Purchase.  The constitutional amendment was approved by voters in the November 2013 election and is now in force, affecting all Federal Housing Administration reverse mortgage products.

NEW KID ON THE BLOCK:   Though most people are familiar with reverse mortgages from TV ads by the likes of Fred Thompson, Richard Wagner and Henry Winkler, the Reverse Mortgage Purchase is not the same thing. The Reverse Mortgage is designed to provide cash while staying in the existing home while the Reverse Mortgage Purchase is used to finance a new home and provide cash.

STATE OF CONFUSION:   Few people know what a reverse mortgage is, much less that there is more than one kind or how to differentiate them from each other.  The purpose of this writing is to help with understanding what a reverse mortgage is all about.  Future posts will cover reverse mortgage purchases and how it is different from a reverse mortgage.

What type of reverse mortgage
  is right for you?

THE REVERSE MORTGAGE:  The Reverse Mortgage, or Home Equity Conversion Mortgage (HECM) program as it is formally known, is an insured FHA program that enables you to receive an amount equivalent to a portion of the equity in your home.  There is no restriction in how you use the funds though most use it to supplement retirement income to pay for usual or even unexpected (medical bills) expenses.

There are some eligibility requirements to qualify to participate in this FHA program, such as you must be at least 62 years of age, have paid off your mortgage (or is considerably paid down), are living in the home, do not have delinquent federal debt, and are able to make ongoing property payments (taxes, insurance, H.O.A. fees, etc.).  The amount of cash you could receive depends on a number on a number of factors, including your age, home location and home value.  And, you may choose to receive the cash in a lump sum, a credit line account, or a fixed monthly amount which you will receive as long as you are in your home.

Here are some of the benefits of a reverse mortgage:

• You're allowed to tap into your home's equity without having to repay the loan, as long as your home is your principal residence.
• There are no payments on the loan and it does not have to be paid back until the last surviving borrower dies, sells the home or permanently moves out.
• The payouts are not taxable and bring no risk of losing Social Security of Medicare benefits.
• There are no restrictions on how you use the money.

Some of the disadvantages are:

• Upfront costs can be higher than with conventional mortgages and are paid out of the equity thereby reducing the amount of available cash.
• Taxes, insurance and home maintenance must be kept current.
• The required mortgage insurance can be costly.

Some of the risks are:

• Since no payment is made on the loan, it is a rising debt and interest continues to accrue.  Over time this can become sizable and will likely reduce assets for your heirs.  However, because of the mortgage insurance, you or your estate can never owe more than the homes appraised value when it is sold.
• If the last surviving borrower has a prolonged stay in a nursing home that lasts more than twelve months, even though the intention is to return to the home, the lender can require payment of the full loan balance.

This is a high level explanation of reverse mortgages.  Do not use this information alone to make a decision regarding taking out a reverse mortgage.  Before making a decision that will affect your financial well-being, get all the facts and seek assistance from a mortgage professional.  The FHA website lists their approved mortgage lenders.  Contacting one of them would be a good place to start.

Next time, the reverse mortgage purchase will be explored.  This program provides a means for purchasing a new home and having extra cash to put away, to use on increased expenses or to take a longed for vacation.