What Is A Reverse Mortgage, How Do Reverse Mortgages Work

What is a reverse mortgage? How can a mortgage be reverse? Is it a loan or what? These are typical questions, which the American seniors do, when they hear about the reverse mortgage for the first time. This article explains the basic features of the reverse mortgage.

An American senior can qualify for the reverse loan if he or she owns a home, where he lives permanently and where he has enough equity. If he has an usual mortgage left, it is not a problem. And he must be at least 62 years old. Thats all. When he wonder how do reverse mortgages work, the answer is, that he or she will take a loan against the equity of his home. The equity will be the only collateral for the loan.

1. To Whom The Reverse Loan Is Targeted?

When the Reagan government decided about the reverse loan it had one target. To offer better life circumstances to the American seniors, who are cash poor but equity rich. That meant seniors, who need more disposable cash. The only source of the money is the homes, which they own.

So they planned a loan, which used the equity of the home, i.e. seniors who wanted to go on living in their old homes could continue that but who had also an opportunity, if they wanted, to eat the equity, which they had saved during many years.

2. The Payments To The Senior Are Tax Free.

This is quite clear, because the loan comes from the equity, which a senior has paid using his salary. And he has paid taxes from his salary already once. However, it is wise to check this issue from the state, where a senior lives, because in some states the lump sums are taxable. The monthly payments, which are used during the same month are usually tax free.

3. A Senior Can Dictate, How The Lender Will Pay To Him.

This is nice. A borrower, i.e. a senior can order a bank, how it will pay to him. The alternatives are the lump sum, the monthly payments, the credit line or the combination of these. Of course the needs of the senior will order the payment way. Usually these loans are used for the serious purposes, like for the increased medical bills, house repair etc., but nobody will ask how the loan will be used.

4. Maximum Three Seniors Can Become The Borrowers.

The couple or maximum three borrowers can become the borrowers, but in this case all must qualify. This means, that they all must live in the home permanently and be the official owners of the property. It is not a must, that they are relatives. The loan terms will be calculated along the age of the youngest borrower.

5. The Loan Will Be Paid Back, When The Last Borrower Will Sell The Home, Move Away Or Pass Away.

As long as even one borrower will live in the home, the running time just goes on. But when the last borrower will die, move away or sells the home, the home will be sold and the selling price will be used to pay away the loan capital, interests and the costs. The obligatory mortgage insurance will cover the costs, which a home selling price cannot do.

The home equity is honestly the only collateral for the home. In no case a borrower has to use his other assets to pay for the reverse loan. Nor has the heirs to pay it. This is why the lender will not ask the income statement or the credit score, when a senior will apply for the reverse loan.

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Retire With Reverse Mortgage, Earn Secure And Regular Income

Have you noticed, that the reverse mortgage is for a senior, who needs a supplemental income and who has the home equity as an only source of money. If you ponder the reverse mortgage as one option, read this article!

First, the reverse mortgage loan is for a senior, who is at least 62 year old, own a home, which is his or her permanent home and where he has equity left. The lender will not ask any income nor credit score, because the loan is always taken against the equity. A senior or heirs will never owe more than the market value of the home.

A borrower can not lose the home, if he pays the taxes, the property insurances and keeps the property in a good shape. If not, the lender has the right to claim, that the property will be sold and the loan capital, the accrued interests and all the costs will be paid back. A borrower has to take a mortgage insurance, which will be used if the home selling price cannot cover all the costs.

You Order, How The Lender Will Pay.

It sounds odd, but the lender honestly will pay to the borrower according to the timetable, which the borrower has ordered. The borrower can pick the monthly payment, lump sum, credit line or the combination of some or all of these. The borrower has no back payments during the loan running time, but the capital, interests and all the costs will be paid back when the running time has been ended and the home sold.

How To Pick The Timing?

This depends on your plan. If you already know, how much you will need per month, or annually, then the plan is made following this need. If you do not know, then you have another alternative. If you want to be ready for an extra medical bills, for example, you can select the credit line and use it when or if needed. Or you can get the needed reverse mortgage information and see whether you will need it in the future.

Reverse Mortgage As A Supplemental Income.

The maximum reverse mortgage loan is $ 625.500 which means it cannot be the one and only source of money to cover your living costs. For most seniors the reverse loan is a supplemental source of money and they use it to cover sudden extra costs, like the home repair or medical bills.

If You Want To Play It Safe, Pick The Fixed Interest Rate.

The borrower will reamain the home ownership, which means that the home value increases benefits him. However he will start to enjoy about this benefit after the running time is ended. The biggest cost item is usually the accrued interest rates. When a senior succeed to agree the fixed rate loan during a recession, when the rates are low, that can honestly save a lot of money and to make the planning safe.

Pick A Reputable And Well Known Lender.

A reverse loan agreement is always a long term commitment, which means that the lender selection is a careful process. It is clear that only the reputable, long term companies can fulfil the requirements. The reverse loans, which are secured by the Federal Government are safe, because the Government will pay to the lnder, if the original lender cannot do that.

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How The New FHA Reverse Mortgage Saves Costs

Have you heard how the new FHA reverse mortgage loan program gives a senior a possibility to buy a smaller home or home from another location without using all the savings, plus that a senior can save thousands with the process?

The new FHA reverse mortgage program has an ideal timing. Many seniors suffer from the hard recession, dropped share prices and rising living costs, including the medicines. What they need is a source to grow the daily income. For many the home equity is the only source, which FHA has understood.

FHA reverse mortgage was developed after FHA noticed, that many seniors first sold their bigger homes and bought smaller ones. Then they signed the reverse loans against the smaller ones. What happened was, that they paid the closing costs two times.

New HECM Reverse Mortgage For Home Purchase Saves Costs.

New FHA reverse mortgage gives an opportunity to buy a new home with the reverse mortgage without selling the old home. The allowed home types are single family homes, condos or a small multi family residences. Seniors can reveal some of the existing equity into cash.

As long as the property is their primary home, they will enjoy about the monthly payments, which are tax free. Plus they can rent out the old home and to get an extra disposable monthly cash. The lender follows the payment instructions of the borrower. The alternatives are the monthly payments, lump sum, credit line or the combination of these all.

Here Is, How You Can Get The New FHA Reverse Mortgage.

First, you have to be at least 62 years old and own a home, where you live permanently and where you have equity left. Altogether three seniors can become borrowers, but then everybody must fulfil the requirements. A borrower must go through the counselor meeting, where he has a chance to ask advice.

How Much A Senior Can Get With The New FHA Reverse Mortgage?

Usually the loan sum is 35 – 55 % of the home equity. However, it is not wise to take a very small reverse loan, because the costs can take the major part of the equity. The loan sum is not fixed, but depends on the appraised value of the home, on the level of the interest rate and on the age of the borrower, or if they are many, on the age of the youngest borrower. The ceiling is in all cases $ 625.500.

A Senior Can Get Rid Of The Monthly Mortgage Payments.

When a senior wants to buy a smaller home with FHA reverse mortgage and to sell an old home, where he has mortgage left, he will honestly improve his monthly financial situation. First, he will pay away the old mortgage, then he will take a reverse loan against the equity of the new home plus he will get an extra sum of cash money. In the end of the day, he will not pay any monthly mortgage payments.

If The Market Is Soft, A Senior Can Postpone The Sale Of The Present Home. Let us assume, that a senior wants to buy a smaller home with the reverse loan, but does not want to sell the old home, because the market prices are down. So he decides to wait until the prices rebound. What he can do is, that he can rent out the present home and buy a new one with HECM reverse mortgage for home purchase and to wait until the prices recover.

A senior Can Never Owe More, Than The Value Of The Home.

This makes a new FHA reverse mortgage riskless to the borrower and to his heirs. The only collateral, which the loan has is the home equity. The running time will end, when the last borrower will sell the home, move away or pass away. Then the home will be sold and the selling price is used to pay the loan capital, interests and all the costs. If it does not cover the whole sum, the mortgage insurance will pay the rest.

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HUD Reverse Mortgages, Has The Widow Spouse To Pay The Loan

Do you belong to the group, who has HUD reverse mortgages, but whos name is not in the title nor who has not signed the agreement? What if your spouse will pass away and you have to pay the whole outstanding balance?

It is generally known, that the HUD reverse mortgages claim in their terms, that the borrower has never to use his or her other assets to pay back the reverse loan. That the home selling price and the reverse mortgage insurance will cover the whole loan amount, always.

However, there are three widows of the borrowers, who were forced to do this. With the heavily decreased home prices this is a tough job. So to prevent the foreclosure these three widows decided to sue HUD, The Department Of Housing And Urban Development. What happened?

These widows claim that HUD changed in 2008 the old rule, which said that the borrower should never pay more than the value of the home and if this does not cover the whole amount, the missing part will be paid from the obligatory mortgage insurance. Sounds clear.

But according to the new HUD practice, they claim that the spouse has to pay the whole outstanding loan balance, if he or she wants to keep the property. This is tough, if the home price is lower than the total amount of the loan capital, accrued interests and all the accrued costs.

1. The Names In The Title And Loan Agreement Matter.

The system is very clear. The borrowers are those seniors, who have signed the agreements of the HUD reverse mortgages. When the last borrower will pass away, will move permanently to another location or will sell the property, the home will be sold and the selling price will be used to pay back all the money, which is owed to the lender. The remaining part belongs to the borrower or to the heirs. If the heirs want to keep the property, they have to pay away the owed amounts to the lender.

2. The Widows Wanted To Keep The Home.

The widows in question wanted to keep the homes, which was impossible because the home prices were decreased below the amount owed and they were unable to get the funding to finance the deals. The American Association Of Retired Persons Foundation claims that the HUD rule change was made in secret and they also said, that the HECM program follows the consumer protection practice, where the term homeowner includes the spouse.

3. If A New Buyer Will Buy The Property, It Will Be Sold At The Market Price.

Think about this. If a widow spouse wants to buy the property, he has to pay all the owed amounts to the lender, which will exceed the home present value. But if the outsider will buy the property when it will be sold, he or she will get it at a lower price. This cannot be fair according to The American Association Of Retired Persons .

4. In July 2011 The Court Made A Decision.

Actually HUD won this case, which is natural, but not so human. However, if we remember the basic reverse mortgage agreement, the decision followed the principles. The problem was, how to keep the old homes with a current market price. The answer is simple. The spouses could have bought the homes, when the lenders were selling them. They could have done this by using the reverse mortgages, because there were a lot of equity left. Maybe The American Association Of Retired Persons just tested the system and tried to change it to become more consumer friendly.

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The 3 Rare Features Of The Reverse Mortgages

Have you ever thought, how simple solutions the reverse mortgages offer? Have you ever doubted, that they may be more complicated products, than what you first thought? Read about the rare features, which the reverse mortgages include.

The reverse mortgages are meant for the American seniors 62 and over, who own their homes, where they live permanently. These people need more disposable money and the home equity is in many cases the only source. They are often called the cash poor but equity rich people.

The reverse mortgages are always taken against the equity of the home and the only obligation, which the borrower or borrowers have is to keep the property in a good shape and to pay the taxes and insurances. There is no back payments during the loan running time. On the contrary the lender will pay to the borrower according to the instructions, he has got.

The loan capital, the accrued interests and all the costs will be unpaid as long as the borrower does not sell the home, move away permanently or pass away. If this happens the property will be sold and the capital, accrued interests and all the costs will be paid using the selling price, or if this does not cover the whole sum, the obligatory mortgage insurance will pay the missing part.

1. Who`s Name Will Be In The Title?

If a couple takes the reverse mortgage it matters, whether they put only one name into the title. If this one, the borrower, will pass away, the property will be sold, which will cut the running time. But if the couple puts both names into the title, the running time will end, when the last one will pass away, for instance.

Actually three seniors can be borrowers, but all must fulfil the qualifications. When the age of the borrower influences on the loan amount, the lender uses the age of the youngest borrower. On the other hand, the older the borrower, the more he or she can get, so the borrowers must think thoroughly, what they want. If the borrowers want to maximize the loan amount, then the oldest one should become the borrower alone, but if they minimize the risk, then the group members can be the borrowers.

2. When The Loan Is Signed, The Borrowers Cannot Change The Names In The Title.

This means, that this topic must be decided before the seniors sign anything. Seniors have to remember, that the consumer protection laws protect only the homeowners and the borrowers. The change of the law is right now pending.

3. Make A List About All The Costs Involved.

The reverse mortgages include several costs. It is a temptation not to calculate these, because the reverse loan seems to be money from the thin air, because there is no back payments during the running time of the loan. For instance the origination fee is 2 % for the first $ 200.000 plus 1 % of the value above 200.000.

The mortgage insurance is mandatory and will cover the part of the costs, which exceeds the home selling price. Note, that the borrower, or the heirs, has never to pay the reverse loan from their other assets. A big choice is to select between the fixed and variable interest rates, because the accrued interests form a big part of the costs.

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5 Facts How The Reverse Mortgage Lending Is Changing

Have you noticed, that the reverse mortgage lending is changing and the market is waiting how? The Consumer Financial Protection Bureau will follow up the actions from the future study concerning the reverse mortgage lending.

The need for a new office and new rules comes from the fact, that this industry includes a lot of scam artists, which do not follow any good practices. They utilize the fact, that the reverse loans are complicated products and many seniors do not understand, what they sign.

1. What Is The Consumer Financial Protection Bureau?

It is a Federal Agency, which operates under Dodd-Frank and works against the predatory practices and other abuses in the reverse mortgage industry. Earlier these tasks were split between seven different agencies. The main focus is to protect senior people from the predatory practices by the rulemaking and enforcement authority in the banking and security industries, where the senior people have lost their homes.

2. What IsThe Office Of Older Americans?

That will be formed by the end of January 2012. The target is to focus on the financial products and the deceptive practices, which concern the older Americans. The office will develop, implement and evaluate the programs of Consumer Financial Protection Bureau.

3. The Study Will Be Done.

The Office Of Older Americans will conduct a study about the reverse mortgage lending before july 21 2012. The study tries to identify all unfair practices in the origination of the reverse mortgage lending to protect borrower seniors. It also tries to find out, whether the financial product fits to the circumstances of the seniors.

4. The Results Of The Study.

The study may lead to the new legislation and the removal of many unfair practices, which will be found out. It may touch practices, when the reverse mortgage fits to a senior. It may also touch the cases, when the reverse loan funding is used for the investments. Th earliest time, when the new rules will be effective is late 2012, which means, that the lenders have a lot of time for comments and for the change of their practices.

5. This All Will Improve The Image Of The Industry.

The fact is, that the reverse mortgage industry still include scam artists, whos only target is to milk the seniors. The new legislation and the study will improve the marketing circumstances a lot, which will strenghten the brand image of the reverse mortgage industry.

The reverse loans are financial products, which include a lot of alternatives and details, which make the understanding difficult. The new legislation will help seniors, because new things will be conducted by the law. The products become safer. However, it is sure, that the industry will develop new approaches, which again require new legislation.

Juhani Tontti, B.Sc., Marketing. The Office Of The Older Americans Will Follow, How The Reverse Mortgage Lending Will Develop. The Target Is To Protect The Reverse Mortgage Borrowers From The Scam Artists. Visit: Reverse Mortgages