Reverse Mortgage: The Financial Aid for Seniors

[Mike]

If you're a senior person looking to cash in your home equity and use it to your advantage, a reverse mortgage can help. With a reverse mortgage, you can convert your home equity into a steady flow of tax-free income thereby receiving a paycheck at regular intervals. Since the loan provides easy flow of cash, therefore it is the preferable choice of seniors in the US as well as in UK, Canada and even in India.

This article will help you get an idea of reverse mortgages, especially the aspects given below.

• What is a reverse mortgage?
• Do I qualify for the loan?
• How much of cash is available?
• How do I get the cash?
• Are there any drawbacks?

What is a reverse mortgage?

Reverse mortgage is a home loan which provides you with cash if you're planning for retirement or have already retired. Such a loan does not require to be paid back until the loan period is over and you can continue to own your home even during the life of the loan.

Do I qualify for the loan?

Unlike other loan options, there isn't any income or credit requirement to qualify for a reverse mortgage except that there shouldn't be any debt on your home. And, even if there is, it should be paid off by the cash proceeds of the reverse loan.To be eligible for the loan, one has to be 62 years or above.

How much of cash is available?

The amount you receive through a reverse mortgage will depend on: How old is the youngest borrower, The appraised value of your home, The equity built up in your home, What loan program you choose, Current mortgage rates, How do I get the cash?

You can receive funds from a reverse mortgage in different ways. The lender or the company can provide you with a single payment.You may ask for monthly cash advances.You can apply for a credit-line account which gives you the opportunity to withdraw a required amount of cash whenever you are in need.

The lender may allow for a combination of monthly cash advances as well as credit-line.

Are there any drawbacks?

A reverse mortgage is just the opposite of a traditional mortgage which requires the payment of the principal loan amount along with interest on a monthly basis. This helps you to build up home equity thereby raising your home value. But with reverse mortgages, there are no such monthly payments. Hence, the total debt starts going up. The home equity therefore reduces to an extremely low value unless the home value goes up at a higher rate.

Therefore reverse mortgages are often known as rising debt and falling equity.

An example on Rising debt and falling equity.

Monthly Loan Amount : $2,000
Yearly Loan Advance : $24,000
Yearly Interest Rate : 8%
Original Home Value : $250,000
Appreciation Rate of Home Value : 5% per annum
End of Year Principal Amount ($)
Total Interest ($)
Loan Amount ($)
Total Home Value ($)
Home Equity ($)
(Total Home Value - Loan Amount)

The above calculation shows, even if your home value goes up, it may not be enough to raise your home equity. The rate of appreciation in home value should be high enough such that even if your loan balance increases, your home equity won't go down easily.

In spite of its drawback, reverse mortgages are preferable options when it comes to paying for your healthcare costs, remodeling your home, making a big purchase and changing your lifestyle. Moreover, if you have debts to pay off, need money for someone's education or make plans to go on a vacation, reverse mortgages are worth considering.

[mariya08]

thanks for the information about reverse mortgage.i want to share some point towards the reverse mortgage : Reverse mortgages are powerful tools that help eligible homeowners obtain a tax-free cash flow. Over two hundred thousand people have already used Reverse mortgages to enhance their retirement. A reverse mortgage is a government sponsored and insured loan that requires no payments during the period of time you live in your home. Reverse mortgages enable eligible homeowners to access the money they have built up as equity in their homes.

[rachael24]

Some more things I would like to add:

How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

Should I use an estate planning service to find a reverse mortgage?
I've been contacted by a firm that will give me the name of a lender for a "small percentage" of the loan? HUD does NOT recommend using an estate planning service, or any service that charges a fee just for referring a borrower to a lender! HUD provides this information without cost, and HUD-approved housing counseling agencies are available for free, or at minimal cost, to provide information, counseling, and free referral to a list of HUD-approved lenders. Call 1-800-569-4287, toll-free, for the name and location of a HUD-approved housing counseling agency near you.

How do I receive my payments?
You have five options:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.