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WHAT IS A REVERSE MORTGAGE?
A Reverse Mortgage is
a unique loan program that enables homeowners that are age
62 and older to use their equity without creating a
monthly payment obligation. Thus, the reverse mortgage
program enables seniors that may be “real estate rich and
cash poor” to unlock the financial potential in their
homes, and let their homes work for them. Additionally,
the reverse mortgage has no income or credit requirements
to qualify.
In general, the
reverse mortgage does not become payable until the senior
homeowner no longer occupies the property as his/her
primary residence. At that time, the outstanding principal
and the accrued interest become due. Typically, the loan
is paid off with the proceeds of the sale of the home from
the borrower’s estate. However, the borrower’s
estate/family may decide to refinance the loan and retain
the property. Any proceeds in excess of the amount owed to
the lender belong to the borrower or the borrower’s
estate.
Thus, the reverse
mortgage is simply a loan against the borrower’s principle
residence. The borrower retains ownership of the home. If
the borrower decides to sell the property any funds in
excess of the payoff amount belong to the borrower, as is
the case with a regular mortgage or home equity loan.
WHO QUALIFIES FOR A REVERSE
MORTGAGE?
Reverse mortgages are
available to homeowners that are age 62 and older. All
persons listed on the deed to the property must be at
least age 62. The borrower must occupy the property as his
primary residence and all existing liens must be paid off
at the time of settlement. Thus, the proceeds of the
reverse mortgage are available to pay off any outstanding
mortgages against the property. As an additional
safeguard, HUD requires that each potential reverse
mortgage borrower be advised about the reverse mortgage
program by an independent HUD-approved counseling agency.
This counseling is free of charge to the borrower.
WHAT CAN I DO WITH THE PROCEEDS OF
THE REVERSE MORTGAGE?
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Free up monthly income.
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Do home improvements.
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Pay off credit card debts.
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Pay for in-home health care.
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Purchase long-term care insurance.
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Supplement income.
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Plan your estate.
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Purchase a car.
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Travel.
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Prepare for emergencies.
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Purchase a new home or condominium.
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Pay off your existing mortgage.
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Anything you want!
WHAT ARE THE BENEFITS OF A REVERSE
MORTGAGE?
There are several
benefits associated with the reverse mortgage. First,
there are no income or credit requirements when qualifying
for this loan. Second, the money received from this loan
is not taxable as income. Third, the borrower has no
repayment obligations until the property is no longer his
residence. Thus, the borrower may live in the property
until his/her death without ever making a payment back to
the loan. Another significant benefit of this loan is the
security of knowing that reverse mortgages are fully
insured under the federal government’s Federal Housing
Administration’s mortgage insurance program.
Consult your tax advisor.
WILL THE BORROWER BE TAXED ON THE
PROCEEDS FROM THE REVERSE MORTGAGE?
No, the borrower will
not be taxed on the principal received from the reverse
mortgage because this is a loan and therefore is not
taxable as income.
HOW DO I GET THE MONEY?
With a reverse mortgage, you have six
payment options to choose from:
LUMP SUM CASH: Draw the maximum amount
of cash.
LINE OF CREDIT OPTION:
Draw out cash at the times and in the amounts of your
choosing up to the maximum amount. The money not drawn
does not accrue interest and increases in value each year.
TERM OPTION: Receive
equal monthly payments for a fixed period of time that you
select, for example, 5 or 10 years.
TENURE OPTION: Receive
equal monthly payments for life or as long as you occupy
your home as your primary residence.
MODIFIED TERM OPTION:
Set aside a portion of loan proceeds as a line of credit
and receive the remainder in the form of equal monthly
payments for the fixed period of time that you have
selected.
MODIFIED TENURE
OPTION: Set aside a portion of loan proceeds as a line of
credit and receive the remainder in the form of equal
monthly payments.
If your financial
needs change, you can change payment plans at any time, as
many times as you wish. Regardless of the payment option
chosen, the borrower may use the available funds for any
reason whatsoever. It should also be noted that each
individual case is different. A great feature of the
reverse mortgage is that the borrower may combine any or
all of these options in order to customize a payment plan
that will meet the borrower’s unique financial situation.
CAN THE SENIOR BE FORCED TO SELL OR
VACATE THE HOME IF THE MONEY OWED ON THE LOAN EXCEEDS THE
VALUE OF THE HOME?
A reverse mortgage borrower has three
(3) responsibilities:
1. Occupy the property as his/her
primary residence;
2. Keep homeowner’s insurance on the
property throughout the life of the loan; and
3. Pay all real estate property taxes
and other property assessments throughout the life of the
loan.
Thus in general, as
long as the borrower can satisfy these requirements, the
borrower will NEVER be forced to sell the home.
Additionally, when the
loan does finally become due, the reverse mortgage lender
is only secured to the real property. Thus, the lender can
only look to the value of the real estate for repayment of
the reverse mortgage and not any other asset in the
borrower’s estate. Furthermore, neither the borrower nor
the borrower’s estate will be subject to any claim that
may arise if the value of the property is less than the
payoff of the reverse mortgage. FHA mortgage insurance
will cover any balance due the lender.
HOW DOES A REVERSE MORTGAGE DIFFER
FROM A HOME EQUITY LOAN?
While both reverse
mortgages and home equity loans enable senior homeowners
to turn the equity in their home into spendable dollars,
there are important differences between these two types of
mortgages.
First, home equity
loans require regular monthly payments in order to repay
the loan. These payments begin as soon as the loan is
settled. In contrast, a reverse mortgage does not have to
be repaid as long as the home remains the senior’s primary
residence. In other words, the loan becomes due only when
the senior no longer occupies the property.
Second, home equity
loans are based on the borrower’s income and credit
history. A home equity loan borrower may be required to
requalify for the home equity loan each year. If the
borrower does not qualify, than the lender may require
that the loan be paid in full immediately. However, income
and credit are not obstacles for seniors who want a
reverse mortgage because there are absolutely no income or
credit requirements to qualify. It should also be noted
that there are no requalification requirements.
WILL THE BORROWER’S HEIRS OWE
ANYTHING TO THE LENDER UPON THE DEATH OF THE BORROWER?
Upon death, the loan
balance becomes due and payable. The estate may repay the
loan by either selling the home or by refinancing the
mortgage. If the loan exceeds the value of the property,
the estate will owe no more than the value of the
property. No additional financial claims may be made
against the heirs or the estate. In a worse case scenario,
nothing more than the value of the real estate is ever at
risk to the borrower’s heirs because of a reverse
mortgage.
WILL REVERSE
MORTGAGE PAYMENTS AFFECT SOCIAL SECURITY, MEDICARE,
SUPPLEMENTAL SECURITY INCOME (SSI) OR MEDICAID BENEFITS?
Reverse mortgage
payments do not affect Social Security or Medicare
benefits because those benefits are not based on the
assets of the borrower. However in certain programs,
beneficiaries must keep their liquid assets under certain
limits. Generally, if the proceeds from the reverse
mortgage are not spent in the month received, then these
funds are considered part of the liquid assets and may
adversely affect eligibility for SSI and other programs.
Therefore, a borrower who also receives SSI or
participates in other income- or need-based programs
should never draw more money than the borrower actually
needs to spend that month. Regulations for
state-administered programs such as Medicaid and food
stamps all have different eligibility requirements.
Accordingly it is suggested that the borrower consult
their attorney, financial advisor, or a benefits
specialist at the local area Agency on Aging or the local
offices for these programs to determine how reverse
mortgage payments may affect the borrower’s particular
situation.
WHERE CAN I GET MORE INFORMATION ON
REVERSE MORTGAGES FOR SENIORS?
To learn more about
reverse mortgages and other types of financial
alternatives,
please complete an application and a professional loan
officer will contact you.
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