What is a Reverse Mortgage?

A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash. The money from a reverse mortgage can provide seniors with the financial security they need to fully enjoy their retirement years.

The reverse mortgage is aptly named because the payment stream is "reversed". Instead of making monthly payments to a lender, as with a regular first mortgage, also known as a "forward" mortgage, a lender makes payments to you.

You continue to own your home, hold title to your home and are responsible for maintaining your home when you have a Reverse Mortgage.

The money from a reverse mortgage can be used for anything: daily living expenses; home repairs and home modifications; medical bills and prescription drugs; pay-off existing debts; continuing education; travel; long-term health care; purchase insurance annuity products; prevention of foreclosure; and any other needs.

To qualify for a reverse mortgage, you must be at least 62 and own and live in your own home. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. In fact, many seniors get a reverse mortgage to pay off a first mortgage.

You choose how to receive the money from a reverse mortgage. The options are: all at once (lump sum); fixed monthly payments (for up to life); a line of credit; or a combination of these options.

The size of the reverse mortgage you can get depends on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates and your home's rate of appreciation. In general, the older you are and the more valuable your home, the larger the reverse mortgage can be.

The costs associated with getting a reverse mortgage include the origination fee, an appraisal fee, and other charges similar to those for a regular mortgage. If you choose a government insured loan there is a charge for FHA insurance. All costs may be financed as part of the reverse mortgage loan.

The money provided to you from a reverse mortgage is "tax-free" and does not affect regular Social Security or Medicare benefits. However, the funds received from a reverse mortgage may affect your eligibility for certain kinds of government assistance, such as Medicaid or state assistance programs. You should check into this before getting a reverse mortgage. Consult with your local Area Agency on Aging (to locate, call 1-800-677-1116) or consult a tax attorney.

Before applying for a reverse mortgage, you must first meet with a reverse mortgage counselor. A mortgage lender can provide you with the names of approved counseling agencies in your area. A list of approved counseling agencies nationwide is posted on the web by the U.S. Department of Housing and Urban Development. The counseling is provided to you free of charge.

The counselor's job is to educate you about reverse mortgages, to inform you of other alternative options available to you given your situation, and to assist you in determining which particular reverse mortgage product best fits your needs.

In general, counseling sessions are done face-to-face, although telephone counseling is becoming more prevalent.

No payments are due on a reverse mortgage while it is outstanding. The loan becomes due and payable when you cease to occupy your home as a principal residence. This can occur if you (the last remaining spouse in cases of couples) pass away, sell the home, or permanently move out.

The home does not have to be sold to pay off the loan. You (or your heirs) can pay off the reverse mortgage and keep the home. In any event, the amount owed on the reverse mortgage can never exceed the value of the home at the time the loan must be repaid. However, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.

Three reverse mortgage products are available to consumers in the United States.

The most popular reverse mortgage is the federally insured reverse mortgage called the FHA Home Equity Conversion Mortgage or HECM. The other major product is the Home Keeper reverse mortgage developed in the mid-1990s by Fannie Mae. This reverse mortgage product may be used to purchase a home. A jumbo reverse mortgage called the Cash Account Plan is also available.

Common Reasons to Obtain a Reverse Mortgage:

Seniors have been obtaining Reverse Mortgage loans for a variety of reasons. Since the proceeds from a Reverse Mortgage loan are tax-free, monthly mortgage payments are not required and the proceeds can be used for just about any purpose. Many Seniors are realizing financial flexibilities that they never expected would be available to them again.

Below are just a few of the common reasons and uses that Reverse Mortgage borrowers have identified:

Income:

• Obtain a lump sum of money
• Receive monthly payments
• Have access to a Line of Credit
• Any combination of these options, while eliminating the need to ever make mortgage payments again!

Debt Reduction:

• Pay off current mortgage loans
• Pay off personal liens
• Consolidate debts

Housing Considerations:

• Pay real estate taxes
• Pay for homeowners insurance
• Maintenance and upkeep of your home
• Home improvements and additions
• Purchase a new home!

Financial Planning Considerations:

• Estate planning
• Annuities
• Long-Term Care
• Life Insurance
• Maintaining your financial independence

Quality of Life Considerations:

• Being able to stay in your home as long as you chose!
• Travel
• Vacations
• Vacation properties
• Real estate investment opportunities
• Educational funding for you and/or your family
• The comfort of knowing that your family and heirs will not need to provide financial support to maintain your lifestyle

Borrower Safeguards and Protections:

Reverse Mortgage loans are designed by the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, and other private institutions. Most of the Reverse Mortgage loans made today are insured by the Federal Housing Administration (FHA), a government supported mortgage insurance program.

All borrowers must obtain counseling prior to applying for a Reverse Mortgage. Counseling is only available from approved, independent, third-party sources. The counseling is designed to highlight and discuss:

• Financial implications of obtaining a Reverse Mortgage
• Other options that may exist including housing, social service, health and financial programs
• Other home equity conversion options that may exist
• Possible tax consequences for the homeowner and their heirs
• Role and relationship between the homeowner and the lender, financial advisors, estate planning services, etc…
• Allowable costs and expenses associated with Reverse Mortgages
  

Additionally, consumers have a variety of nationally recognized resource providers that can be accessed for additional information including:

The Department of Housing and Urban Development (www.hud.gov)
The Fannie Mae Foundation (www.fanniemae.com)
A. A. R. P. (www.aarp.com)
National Reverse Mortgage Lenders Association (www.nrmla.com)

* The above are excerpts from information provided by the National Reverse Mortgage Lenders Association.