Reverse Mortgages

Help Your Parents Understand the Reverse Mortgage

If your parents live in Florida, I will be glad to work with you, wherever you may be located in the US, in the interest of helping them financially with the reverse mortgage. After reading this page, feel free to phone me (Stewart Ogilby) at (800) 998-2523 with any questions.
It's comforting to believe our parents are financially stable in their homes, and that they'll live in familiar surroundings filled with good memories until the end of their lives.

Gradual or unexpected costs can jeopardize this scenario. For instance, older people often have to take expensive drugs for various ailments. The cost of such drugs can seriously tax persons living on fixed incomes. There's also the expenses of things breaking around the house, like the air-conditioning and plumbing, which may have to be repaired. Property taxes may keep rising, along with homeowner's insurance (especially in hurricane-prone Florida). Routine yard work can become too much for those with arthritis or who are limited in their mobility, and need to be purchased. A hospitalization or two can overwhelm the most carefully thought-out plans and leave seniors strapped for money. Frequently, parents are too proud to speak to grown children of increasing financial burdens.

When we find out that finances have become a dilemma for our parents, the first thing many of us think about is selling their house and moving them in with us or into a retirement home. What if your parents would prefer to remain in their own home? There is a practical way to help them achieve this goal. It's called a reverse mortgage. Unfortunately, there is much misinformation and unwarranted apprehension about reverse mortgages. Let's take a look at this concept.

What is a reverse mortgage?

We have found that, by far, the most common misconception about reverse mortgages is that sometime, somehow, a lender, loan company, bank, or the government will take over (take title to) the property. That this idiotic rumor persists illustrates the fact that most people simply do not understand how the reverse mortgage works.
A reverse mortgage works the opposite way of the traditional mortgage. It allows homeowners to access the equity they've built up over the years, like a second or third income. The loan company pays the homeowner instead of the other way around.

A HUD (Housing and Urban Development) Home Equity Conversion Mortgage (HECM) offers a variety of options to suit individual needs. Homeowners may choose to take one lump sum, receive monthly payments, set up a credit line account that lets the homeowners pick and choose when they need money and how much they need, or a combination of the above methods.

With such flexible options, the reverse mortgage can make life much easier on elderly homeowners by providing much needed money to supplement Social Security income or IRA's. It can also be used to pay off in full an existing mortgage (unless it is substantially greater than can be obtained in a reverse mortgage), thereby increasing monthly disposable income.

One of the most important points to remember about a reverse mortgage is that it does not need to be repaid until the borrower sells the home, passes away or moves out permanently. With no repayment required, the homeowner can never be in default and their home is secure, as long as taxes and insurance are paid and the property is kept up.

The requirements

It isn't difficult to qualify for a reverse mortgage. You simply have to be sixty-two years old or older and your home must either be paid off or your mortgage balance sufficiently low. For protection of seniors FHA requires that homeowners meet with a HUD counselor who is knowledgeable about reverse mortgages. This person can explain how reverse mortgages work and answer any questions the homeowner may have.

What you can do with the money

There are no guidelines or requirements as to what can be done with the money. Generally, homeowners use the money to supplement Social Security income, pay medical costs, make repairs or improvements to the home, take vacations, pay credit card debt and taxes, and, simply live better and more comfortably.

The majority of people applying for reverse mortgages choose the line of credit option. This option is the most flexible, and gives the homeowners control over how much money is received and when.

How much does the homeowner receive?

When homeowners speak with a counselor, several things will be determined. How old is the homeowner or the youngest of the married couple? What does the home appraise for? What is the lending limit in the homeowners' area and what is the interest rate? The less owed on the home and the older the homeowners, the more money is available.

Staying in our own homes

You may wonder how this mortgage is paid back to the mortgage company. With reverse mortgages, nothing is paid back until the home is no longer lived in by either homeowner or the home is sold.

If the home sells for more than what is owed to the mortgage company, the extra (residual equity) goes to the selling homeowners or the homeowners' estate.

Typical costs of a reverse mortgage

Arranging a reverse mortgage is similar in some ways to acquiring a traditional mortgage. There are costs involved which include an origination fee, a mortgage insurance premium, an appraisal fee and closing costs. The majority of these fees are usually capped and placed within the reverse mortgage itself so that the homeowner needs very little or no up-front cash. Generally, the only out-of-pocket expense involves the property appraiser, who expects to be paid when he does the job. Even this can be returned at closing to the homeowner, along with the proceeds of the reverse mortgage.

The mortgage insurance premium makes sure that the homeowner or the estate will never owe more than the value of the home when it comes time to repay the loan. It also guarantees that if the loan company goes out of business, the government will take over the loan and continue to make sure the homeowners still receives their money.

Another option

If the homeowners want to sell their old home in order to buy a new one closer to their family, for instance, there's one way to do it using a reverse mortgage.

Through a service called the "Home Keeper for Home Purchase Program," elderly homeowners can purchase a new home without acquiring a monthly mortgage payment and without having to come up with closing costs.

If the new home costs $50,000 more than the old one sells for, then in order to avoid taking out a traditional mortgage, the homeowners must use the entire amount of cash they received from the sale of their old house and find another $50,000.

But with a Home Keeper reverse mortgage, these homeowners can buy the new house using the money they made on the sale of the old house plus the reverse mortgage and avoid monthly mortgage payments and closing costs.

Safeguards

To protect homeowners and their survivors, certain safeguards have been set up. It is guaranteed that if the home sells for more than what is owed to the mortgage company, that extra money will go back to the homeowners or their estate.

The mortgage insurance premium, a mandatory part of the reverse mortgage, guarantees that the homeowners will not be left penniless if the mortgage company goes out of business. The government will step in and take over the loan. It also guarantees that the loan will never be more than the value of the house.

As long as you live in your home, the reverse mortgage does not have to be paid back. You don't need to have a certain income to qualify for this mortgage since there is no monthly payment. You are using the equity you have built up in the value of your home, and fees and interest rates are capped by regulation.

A reverse mortgage cannot become due for any reason while the homeowner(s) are alive and living in the home, and there are no prepayment penalties if the homeowners decide they want to pay off the loan.