General: Reverse Mortgage Advantages

Here is my latest article on reverse mortgage. In it I discuss some of the features and benefits that make reverse mortgages very attractive for cash-strapped retirees.

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The Advantages of Reverse Mortgages
By Charles Kirkendall

In recent years property values have soared, while investment returns have been modest. This has created a situation where a lot of seniors are finding themselves in the position of being house rich and cash poor. These cash strapped seniors are looking for ways to increase their retirement income while continuing to live in their homes. These retirees find that their options are limited, and in most cases require them to risk their home. Enter the reverse mortgage, which can provide many advantages over these other less desirable options.

No Payments With Reverse Mortgages

The biggest advantage of a reverse mortgages is not having to make payments as long as you continue living in your home. In fact, this is the number one reason that seniors choose to borrow reverse mortgages. Almost 80% of reverse mortgage borrowers use a reverse mortgage to pay off their current loans in order to eliminate their house payments. Let's say you owe $50,000 on your first mortgage and borrow $80,000 with a reverse mortgage. This would pay off and eliminate the payment on the first mortgage and provide you with $30,000 to use as you please.

Live in Your Home as Long as You Like

The second advantage of reverse mortgages is the ability to live in your house as long as you like. The great thing about this is the amount you owe on the reverse mortgage can never be more than the house is worth. Let's say you live to 115 and have selected to recieve a $300 a month payments for life from the reverse mortgage. The amount received from the reverse mortgage payments could be substantially higher than the value of your home, yet the amount owed will still only be the value of the home. In this situation, FHA insurance will cover the difference.

Reverse Mortgage Withdrawal Options

Another advantage of reverse mortgages is the different withdrawal options that a you are able to choose. These options include lump sum distributions, line of credit, monthly payments, or any combination of these three. So if you were eligible to borrow $100,000 on a reverse mortgage you could select to receive $30,000 up front to cover current expenses, and hold the rest as a line of credit that you can use whenever you need it. This flexibility of reverse mortgages can significantly improve you financial independence during retirement.

Tax-Free Nature of Reverse Mortgages

Another advantage of reverse mortgage is the tax-free nature of the loan proceeds. The American Bar Association guide to reverse mortgages advises that generally the IRS does not consider loan advances to be income. This means that all the money from the proceeds of the reverse mortgage end up in your pocket.

With these features, reverse mortgage are definitely an option to consider if you are looking for ways to supplement your current income. As with any financial decision, you should seek the advice of a trained professional, a reverse mortgage counselor, to evaluate and determine if a reverse mortgage is right for your situation.

About the author: Charles Kirkendall writes articles on reverse mortages and other senior financial issues. Visit reverse mortgages for more information and resources.

You are free to reprint this article as long as it is reprinted in its entirety including the resource box with all links active.

General: Reverse mortgages provide flexibility

This is an article I found that provides a good examples of an actual borrower that has used a reverse mortgage to give themselves more flexibility during her retirement years.

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Reverse Mortgages give Flexibility to Homeowners
By Nicholas Yulico - Staff Writer

OAKLAND - MARY WAGNER, 79, relies on a 1985 Toyota Camry to travel around the Bay Area, showing off her paintings. But for some time, the elderly artist feared major expenses if her car broke down. Her teacher’s pension and Social Security payments provide a modest income but don’t leave much room for error.

"What would happen if the Toyota gave up, and I wanted to move pieces to an exhibit? I’d be very upset," Wagner said. So a few weeks ago, Wagner joined the growing ranks of senior citizens signing up for reverse mortgages, which allow people to turn their homes into cash machines by pulling out the equity while still living in the dwellings.

Rather than a traditional mortgage, where you pay a lender each month, a reverse mortgage results in a lender sending you checks

People over 62 are eligible to borrow against the equity in their home to get tax-free income. No loan payments are due until the loan ends — typically when an elder sells the house or dies.

Money can come in lump-sum cash payments, regular monthly payments, a line of credit or a combination of these options. The loan amount is determined by a formula based on the borrower's age, the house's value and whether the person is single or married.

In Wagner's case, it allowed her to cash in on the appreciated value of her Oakland hills home while still living in it. She purchased the property in 1975 for $57,000, she said, and it is now appraised at $700,000.

Wagner was able to obtain a $239,000 reverse mortgage. She took a small lump-sum payment to pay off the remainder of her existing mortgage. She also also opted to receive $250 in monthly income and set up a $156,000 line of credit, which she can draw from when she needs cash.

"This now gives me the feeling that anything serious, I can handle," Wagner said.

Types of reverse mortgages

There are three main types of reverse mortgages, which carry different origination fees, rates and borrowing limits. However, they share several common features:

• Your age must be 62 years or older. The older you are, the more cash you can get. The more your home is worth, the more cash you can get.
• The interest is compounded.
• The loans are asset-based and don't require personal credit ratings or monthly payoffs, like home equity credit lines.
• You must pay off your existing home mortgage before getting a reverse mortgage; or you can use a lump-sum payment from the reverse mortgage to pay off the original loan.
• The mortgages are non-recourse loans, which means lenders can only look to a home's value for repayment. In other words, you never owe more than your home is worth when your loan is repaid.
• The income from the loan is non-taxableand doesn't affect Social Security benefits but could affect other public assistance benefits, such as Medicare, Medicaid/MediCal and Supplemental Security Income.

While some have criticized reverse mortgages for their high upfront fees, the products are increasing in popularity and can be good sources of income for the right candidates.

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FHA insured HECMs (Home Equity Conversion Mortgages) account for almost 95% of all reverse mortgages

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The Home Equity Conversion Mortgage (HECM), a reverse mortgage that is insured by the federal government, is the most popular product and accounts for about 95 percent of all reverse mortgages. From fiscal 2001 to 2004, HECMs increased 470 percent, said Jeff Taylor, a vice president with Wells Fargo Home Mortgage. The amount of HECMs issued in the Bay Area so far this year is double that of this time last year, he said.

"Business has been picking up fairly dramatically and has for the overall industry for the last two years," said Marty Appel, a loan consultant with Bay Area Reverse Mortgage.

Appel attributes the increase to dwindling stock portfolios of many seniors on fixed incomes.

Taylor, of Wells Fargo, said the No. 1 use of reverse mortgages is paying off an existing home mortgage. This, in turn, "creates new cash flow that is non-taxable," he said. Home remodeling is also often a big use of proceeds.

But while reverse mortgages have clear benefits, the product is not for everyone, experts say.

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Reverse mortgages are not something you want to for short terms of three or four years due to the large upfront fees.

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"This is not a product that you want to get into for three or four years. You want to make a long-term commitment to this because you're paying these very substantial loan fees upfront," said Dave Carey, reverse mortgage program manager with Fannie Mae.

Fees vary on the different products. For the federally insured HECM, there is an upfront lender fee (generally 2 percent), a settlement charge of about $1,800, and a 2 percent mortgage insurance charge. The mortgage rate on the monthly adjustable HECM is currently 5.5 percent.

Besides the extra income they provide, reverse mortgages also can be a great way to minimize certain people's tax burdens, said Charles Sterck, managing director of Sterck Kulik O'Neill, a San Francisco-based CPA firm that specializes in estate planning.

He provided a hypothetical example of a homeowner who bought a house many years ago for $50,000. Say the house has appreciated in value to $1 million. Selling the house would trigger capital gains taxes. If the homeowner is single, he or she gets an exclusion of $250,000 on the appreciated value, and would pay about a 10 percent capital gains tax on the leftover $700,000 increase in value. If married, the couple gets a $500,000 exclusion and pays a 10 percent tax on the remaining $450,000 increase.

But by staying in the home until death with a reverse mortgage, the house would end up being sold and the leftover equity would likely pass on to heirs without any capital gains tax or estate tax being due.

"I like the reverse mortgage because it allows old people to stay in their home, and that gives them the most comfort. ... This is a great tool for the right party," Sterck said.

Source: Augusta Chronicle

Resource: Reverse Mortgage Resources

Reverse mortgages are fairly complex and confusing beasts and tend not to be understood very well. So with a little digging I was able to find two great resources that will help you research and evaluate whether a reverse mortgage is right for your situation.

First off, wouldn't it be great to know approximately how much you can expect to get from borrowing a reverse mortgage. Wouldn't it also be great if you could get the value for three different options: lump sum payout, line of credit, or estimated monthly payments. Well I found a simple reverse mortgage calculator that will do all of this.

• AARP Reverse Mortgage Calculator

Another thing that you can do with this calculator is to figure up what the amount would be if you were to wait say 5 years to get your reverse mortgage. This will give you a quick comparison to decide if you should maybe wait before borrowing a reverse mortgage. Of course, this won't be completely accurate as the interest rate will fluctuate in the next 5 years.

Another good resource will provide you with a reverse mortgage counselor in your area.

• HUD Approved Reverse Mortgage Counselors

As stated in my previous posts, I highly recommend you talk with a mortgage counselor before you commit to a reverse mortgage program.

General: Are HUD Reverse Mortages Good for Retirement?

Here is another article about reverse mortgages. This one talks specifically about FHA insured HUD reverse mortgages and their benefits.

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Are HUD Reverse Mortgages Good for Retirement?
By Charles Kirkendall

HUD reverse mortgages can be a great tool for Seniors that are looking for additional sources of retirement funds. Through a HUD reverse mortgage, seniors can tap into the equity from their homes without having to make repayments. These funds can provide extra level of security and flexibility during their retirement.

HUD Reverse Mortgage Guidelines

The HUD reverse mortgage program spells out specific guidelines that are used to determine homeowner eligibility. Homeowners must meet the following criteria in order to be eligible for a HUD reverse mortgage:

• Homeowner must be age 62 or older.


• The home must be owned free and clear or have a mortgage balances that can be paid from proceeds of the reverse mortgage.


• The home must be a principal residence.


• The property must be a single-family home, a one-to-four unit dwelling with one unit occupied by the applicant, a manufactured home (mobile home), or a unit in condominiums or Planned Unit Developments.


• The property must meet the minimum FHA property standards.

Since reverse mortgages do not require repayments during the life of the mortgage, there are no asset or income limitations on borrowers receiving a HUD reverse mortgage.

The amount that can be borrowed on a HUD reverse mortgages is determined by the following criteria:

• The borrower's age - The older the borrower the more that can be borrowed against the value of the home


• The loan interest rate - Obviously the lower the interest rate the more that can
  be borrowed.


• The home's value - There is no hard limit for home value to qualify for a HUD
  reverse mortgage, but the amount that may be borrowed is capped by the maximum FHA mortgage limits for an area. This means that owners of a high priced home can't borrow any more than the owners of homes valued at the FHA limit.

Homeowners that qualify can receive payments in a lump sum, on a monthly basis, or on an occasional basis as a line of credit. At a later date the payment options can be restructured if circumstances change. The homeowner can use the proceeds from the HUD reverse mortgage on anything that they choose, such as, home improvements, vacations, healthcare costs or any other daily living expenses.

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the home remains the borrowers primary residence. When the home is sold the Mortgage company recovers their principal, plus interest, and the remaining value of the home goes to the homeowner or to his or her survivors. Should the sales proceeds not cover the amount owed, HUD will pay the mortgage company for any shortfall.

The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage. Typically the mortgage company pays for this insurance and charges it to the borrower's principal balance. This FHA reverse mortgage insurance can make HUD's reverse mortgage program less expensive to borrowers than private programs without FHA insurance.

About the Author: Charles Kirkendall writes about reverse mortgages and other Senior financial issues. Visit reverse mortgage annuity for more information and resources.

Note: This article can be reprinted free of charge as long as it is reprinted in its entirety including the resource block at the bottom with all links enabled.

Fraud: Example of an Unfair Lender

Here is a case where an unfair lender slid in some pretty nasty fees and conditions into a reverse mortgage. This example demonstrates the need to get quotes from several lenders and then go over the contract with a reverse mortgage counselor in order to understand the terms involved:

"One example involves a lawsuit filed by the San Mateo County Public Guardian which, on behalf of Berta Grey, an 83-year old woman, alleged that Transamerica Corporation unfairly and unconscionably charged her what was in effect a shared appreciation fee. This fee gave Transamerica an automatic 50% interest in the difference between the base value of the home when the loan was signed and the appreciated value of the home when the loan terminated, even though the fee bore no relation to the amount she actually borrowed. Additionally, the cost of Berta Grey's reverse mortgage soared when she was required to purchase an annuity in conjunction with her reverse mortgage. An annuity is an insurance product financed out of the home's equity to provide monthly payments to the borrower immediately or after a certain number of years. The San Mateo County Public Guardian alleged that Transamerica charged Berta Gray the cost of the annuity immediately and that interest began compounding on that fee even though she was not due to receive any payment on the annuity until six years after the loan began, at age 89. Under this arrangement, if Ms. Gray died before the six-year period ended, her estate would see no benefit from the annuity purchase, although she had paid in full for it."

Source: http://www.consumersunion.org/

General: Reverse Mortgage Disadvantages

Welcome to the reverse mortgage blog.

I will be bringing you fresh information, news, and articles on reverse mortgages issues. I am going to start this blog off with an article about some of the disadvantages/hazards of reverse mortgages and how you can avoid them.

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The Disadvantages of Reverse Mortgages
by Charles Kirkendall

A reverse mortgage can be an attractive option for many home-owning seniors that are having a hard time making ends meet. With a reverse mortgage, a senior homeowner will receive money for their home equity from a lender without having to make repayments for as long as they live in their home. So with the right reverse mortgage a senior homeowner can maintain their standard of living while retaining ownership of their home.

This of course, is the picture that all the reverse mortgage companies try to paint for prospective borrowers. Nonetheless, there are many differences that have to be understood between reverse mortgage's and conventional loans. If these differences are not understood, they can cause financial problems for reverse mortgage borrowers.

Disadvantages of Reverse Mortgages

The first disadvantage is the relative cost of a reverse mortgage. Reverse mortgages tend to be very expensive when compared with a conventional mortgage. This is due to the rising-debt nature of reverse mortgages. For example, a typical reverse mortgage may provide a homeowner with a $300 per month payment with a yearly interest rate of 12 percent compounded monthly. Over the course of ten years, the homeowner will receive $36,000 in payments, but will owe almost $70,000-almost twice as much as received.

The second disadvantage is the complex and confusing contracts of reverse mortgages, that can have a tremendous impact on the overall cost of a reverse mortgage to the borrower. The complexity of the contracts often allow lenders and third parties involved in arranging reverse mortgages to not fully disclose the loan's terms or fees. These numerous other front-end and/or back-end fees can also quickly drive up the cost of a reverse mortgage. These fees can include origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity and shared appreciation fees.

Out of all these fees, the shared equity and shared appreciation fees should be avoided, as they can quickly raise the cost of the mortgage without providing any benefit to the borrowers. As an example, a shared appreciation fee can give a lender an automatic 50% interest in the difference between the current value of the home when the loan is signed and the appreciated value of the home when the loan is terminated. What makes the fees unfair is the fees have no relation to the amount that is borrowed.

The third disadvantage is the reverse mortgage payments can affect eligibility for old age pensions, Medicaid, or supplemental Social Security income. Senior's may not even realize this problem until after they already have their reverse mortgage, and only then do they find out that this can have the opposite affect on a seniors finances then what they were trying to accomplish in the first place by taking out the reverse mortgage.

Another disadvantage is the fact that reverse mortgages reduce the value of a senior's assets and estate. This will affect the amount of inheritance received by the borrower's heirs.

How to avoid these hazards

The best way for a senior to avoid these hazards is to be careful when choosing a lender, by obtaining bids from three separate lenders. They should take these contracts to a reverse mortgage counselor for evaluation. This will allow them to accurately evaluate the three contracts before deciding on best one for their situations.

About the author: Charles Kirkendall writes articles on reverse mortages and other senior financial issues. Visit reverse mortgage annuity for more information and resources.

Note: This article can be reprinted free of charge as long as it is reprinted in its entirety including the resource block at the bottom with all links enabled.