General: Reverse Mortgage Disadvantages

Welcome to the reverse mortgage blog.

I will be bringing you fresh information, news, and articles on reverse mortgages issues. I am going to start this blog off with an article about some of the disadvantages/hazards of reverse mortgages and how you can avoid them.

Fraud: Example of an Unfair Lender

Here is a case where an unfair lender slid in some pretty nasty fees and conditions into a reverse mortgage. This example demonstrates the need to get quotes from several lenders and then go over the contract with a reverse mortgage counselor in order to understand the terms involved:

General: Are HUD Reverse Mortages Good for Retirement?

Here is another article about reverse mortgages. This one talks specifically about FHA insured HUD reverse mortgages and their benefits.

Resource: Reverse Mortgage Resources

Reverse mortgages are fairly complex and confusing beasts and tend not to be understood very well. So with a little digging I was able to find two great resources that will help you research and evaluate whether a reverse mortgage is right for your situation.

First off, wouldn't it be great to know approximately how much you can expect to get from borrowing a reverse mortgage. Wouldn't it also be great if you could get the value for three different options: lump sum payout, line of credit, or estimated monthly payments. Well I found a simple reverse mortgage calculator that will do all of this.

• AARP Reverse Mortgage Calculator

Another thing that you can do with this calculator is to figure up what the amount would be if you were to wait say 5 years to get your reverse mortgage. This will give you a quick comparison to decide if you should maybe wait before borrowing a reverse mortgage. Of course, this won't be completely accurate as the interest rate will fluctuate in the next 5 years.

Another good resource will provide you with a reverse mortgage counselor in your area.

• HUD Approved Reverse Mortgage Counselors

As stated in my previous posts, I highly recommend you talk with a mortgage counselor before you commit to a reverse mortgage program.

General: Reverse mortgages provide flexibility

This is an article I found that provides a good examples of an actual borrower that has used a reverse mortgage to give themselves more flexibility during her retirement years. Reverse Mortgages give Flexibility to Homeowners
By Nicholas Yulico - Staff Writer

OAKLAND - MARY WAGNER, 79, relies on a 1985 Toyota Camry to travel around the Bay Area, showing off her paintings. But for some time, the elderly artist feared major expenses if her car broke down. Her teacher’s pension and Social Security payments provide a modest income but don’t leave much room for error.

"What would happen if the Toyota gave up, and I wanted to move pieces to an exhibit? I’d be very upset," Wagner said. So a few weeks ago, Wagner joined the growing ranks of senior citizens signing up forreverse mortgages, which allow people to turn their homes into cash machines by pulling out the equity while still living in the dwellings.

Rather than a traditional mortgage, where you pay a lender each month, a reverse mortgage results in a lender sending you checks

People over 62 are eligible to borrow against the equity in their home to get tax-free income. No loan payments are due until the loan ends — typically when an elder sells the house or dies.

Money can come in lump-sum cash payments, regular monthly payments, a line of credit or a combination of these options. The loan amount is determined by a formula based on the borrower's age, the house's value and whether the person is single or married.

In Wagner's case, it allowed her to cash in on the appreciated value of her Oakland hills home while still living in it. She purchased the property in 1975 for $57,000, she said, and it is now appraised at $700,000.

Wagner was able to obtain a $239,000 reverse mortgage. She took a small lump-sum payment to pay off the remainder of her existing mortgage. She also also opted to receive $250 in monthly income and set up a $156,000 line of credit, which she can draw from when she needs cash.

"This now gives me the feeling that anything serious, I can handle," Wagner said.

Types of reverse mortgages

There are three main types of reverse mortgages, which carry different origination fees, rates and borrowing limits. However, they share several common features:

• Your age must be 62 years or older. The older you are, the more cash you can get. The more your home is worth, the more cash you can get.
• The interest is compounded.
• The loans are asset-based and don't require personal credit ratings or monthly payoffs, like home equity credit lines.
• You must pay off your existing home mortgage before getting a reverse mortgage; or you can use a lump-sum payment from the reverse mortgage to pay off the original loan.
• The mortgages are non-recourse loans, which means lenders can only look to a home's value for repayment. In other words, you never owe more than your home is worth when your loan is repaid.
• The income from the loan is non-taxableand doesn't affect Social Security benefits but could affect other public assistance benefits, such as Medicare, Medicaid/MediCal and Supplemental Security Income.

While some have criticized reverse mortgages for their high upfront fees, the products are increasing in popularity and can be good sources of income for the right candidates.FHA insured HECMs (Home Equity Conversion Mortgages) account for almost 95% of all reverse mortgages The Home Equity Conversion Mortgage (HECM), a reverse mortgage that is insured by the federal government, is the most popular product and accounts for about 95 percent of all reverse mortgages. From fiscal 2001 to 2004, HECMs increased 470 percent, said Jeff Taylor, a vice president with Wells Fargo Home Mortgage. The amount of HECMs issued in the Bay Area so far this year is double that of this time last year, he said.

"Business has been picking up fairly dramatically and has for the overall industry for the last two years," said Marty Appel, a loan consultant with Bay Area Reverse Mortgage.

Appel attributes the increase to dwindling stock portfolios of many seniors on fixed incomes.

Taylor, of Wells Fargo, said the No. 1 use of reverse mortgages is paying off an existing home mortgage. This, in turn, "creates new cash flow that is non-taxable," he said. Home remodeling is also often a big use of proceeds.

But while reverse mortgages have clear benefits, the product is not for everyone, experts say. Reverse mortgages are not something you want to for short terms of three or four years due to the large upfront fees. 

The Advantages of Reverse Mortgages

By Charles Kirkendall

In recent years property values have soared, while investment returns have been modest. This has created a situation where a lot of seniors are finding themselves in the position of being house rich and cash poor. These cash strapped seniors are looking for ways to increase their retirement income while continuing to live in their homes. These retirees find that their options are limited, and in most cases require them to risk their home. Enter the reverse mortgage, which can provide many advantages over these other less desirable options.

No Payments With Reverse Mortgages

The biggest advantage of a reverse mortgages is not having to make payments as long as you continue living in your home. In fact, this is the number one reason that seniors choose to borrow reverse mortgages. Almost 80% of reverse mortgage borrowers use a reverse mortgage to pay off their current loans in order to eliminate their house payments. Let's say you owe $50,000 on your first mortgage and borrow $80,000 with a reverse mortgage. This would pay off and eliminate the payment on the first mortgage and provide you with $30,000 to use as you please.

Live in Your Home as Long as You Like

The second advantage of reverse mortgages is the ability to live in your house as long as you like. The great thing about this is the amount you owe on the reverse mortgage can never be more than the house is worth. Let's say you live to 115 and have selected to recieve a $300 a month payments for life from the reverse mortgage. The amount received from the reverse mortgage payments could be substantially higher than the value of your home, yet the amount owed will still only be the value of the home. In this situation, FHA insurance will cover the difference.

Reverse Mortgage Withdrawal Options

Another advantage of reverse mortgages is the different withdrawal options that a you are able to choose. These options include lump sum distributions, line of credit, monthly payments, or any combination of these three. So if you were eligible to borrow $100,000 on a reverse mortgage you could select to receive $30,000 up front to cover current expenses, and hold the rest as a line of credit that you can use whenever you need it. This flexibility of reverse mortgages can significantly improve you financial independence during retirement.

Tax-Free Nature of Reverse Mortgages

Another advantage of reverse mortgage is the tax-free nature of the loan proceeds. The American Bar Association guide to reverse mortgages advises that generally the IRS does not consider loan advances to be income. This means that all the money from the proceeds of the reverse mortgage end up in your pocket.

With these features, reverse mortgage are definitely an option to consider if you are looking for ways to supplement your current income. As with any financial decision, you should seek the advice of a trained professional, a reverse mortgage counselor, to evaluate and determine if a reverse mortgage is right for your situation.

About the author: Charles Kirkendall writes articles on reverse mortages and other senior financial issues. Visit reverse mortgagesfor more information and resources.

You are free to reprint this article as long as it is reprinted in its entirety including the resource box with all links active.