Just the other day, I ran into an old buddy of mine, who wanted me to sell his house because he needed some quick cash due to a upcoming divorce. He told me that a loan officer asked him to consider about “Reverse Mortgage” which could possibly put some money into his pocket, but after several hours of explaining this process to him, my friend left his office more confused than he was when he went in. Yet there is a lot of people, who do not fully understand the concept behind reverse mortgages. So I broke it down for him:
Basically, Reverse Mortgages, involves the elderly (age 62 and older), who have a certain percentage of equity build up in their primary residence (second homes and investment properties do not qualify) and they obtain a loan against that equity where no monthly payments are made until they either happen to die, sell or leave the residence, but (the owner(s) still have to pay for property taxes and homeowner’s insurance. This FHA insured act was enacted by President Reagan in 1987 as a part of the Housing and Community Development Act also known as the Home Equity Conversion Mortgage (HECM) to support the elderly Americans where approximately 48% of the nation’s population among the elderly complained of having financial difficulties after retirement and converted to reverse mortgaging.
Some of the advantages of reverse mortgages are the ability for the elderly to consolidate or pay debt, fund age care, upgrade or renovate their home, help their family and grandchildren and pay for their vacation with the financial arrangement to receive their money either in a lump sum as cash, as an annuity, as a line of credit or any combination of the three. The proceeds of the reverse mortgage loan are declared as “non-taxable” and do not directly affect Medicare, SSI or other public benefits, but if the owner was to receive a lump sum it could possibly be classified as a financial investment or “liquid assets”and deemed as a income test in regards to taxes, which includes sums over $40,000 and sums under $40,000 not spent in 90 days.
Some of the dis-advantages or shortcomings of reverse mortgaging are the possible high costs depending on the loan-to-value ratio, higher interest rates than a conventional “forward mortgage”, and the interest compounds over the life of a reverse mortgage, which means that the interest from the unpaid monthly payment can balloon making it more than likely for the equity of the home to be completely depleted at it’s maturity, and many consumers have obtain this type of loan without fully understanding the terms and conditions where it has been suggested that some of the lenders have been taking advantage of the elderly, which is reported by consumer advocacy groups, although, a 2006 survey showed that 93% of borrowers indicated that their reverse mortgage deals had made a positive impact in their lives. (Closing costs, existing mortgages balances, other liens and property taxes or homeowner’s insurance are typically paid out of the initial principal and any additional proceeds available can be distributed to the borrower.) On April 25, 2014, FHA revised HECM age eligibility regulation to extend certain protection to spouses younger than 62, whereas, under the old guidelines, if the older qualified spouse was to die and the unqualified spouse was unable to pay or refinance the reverse mortgage loan than they would have to sell their residence or face foreclosure, but now under the new guidelines the younger spouse can stay at the residence as long as they maintain the property taxes and homeowner’s insurance and if not than the loan is payable, which also includes maintaining the property and the loan is also payable if the title to the property is transferred to a non-borrower. In 2008, the Housing and Economic Recovery Act was established where the proceeds of a reverse loan can be used to purchase a new primary residence as long as the borrower can pay the difference of the new sales price plus closing costs. Well there you go my friend now if you still don’t understand my explanation about reverse mortgage...than don’t get it and let’s go sell your damm house!
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