Advantages and Disadvantages of a Reverse Mortgage

For many people, a reverse home mortgage is a good way to increase their income in retirement - positively affecting their quality of life.
Advantages of a Reverse Mortgage
The main advantage of reverse mortgages is that they are an extremely flexible financial planning product with very few - if any - restrictions on how you receive and use the money. To many people, a reverse mortgage simply sounds too good to be true. But, there really are no catches - given the right set of circumstances, a reverse mortgage is an ideal way to increase your spending power in retirement. Key advantages and benefits of reverse mortgages include:

No Risk of Default: Unlike a home equity loan, with a reverse home mortgage your home can not be taken from you. If you default on a home equity loan, you could lose your home. The Reverse Mortgage Lenders have no claim on your income or other assets.

No Downside: You will never owe more than your home's value at the time the loan is repaid, even if the reverse mortgage lenders have paid you more money than the value of the home.

Tax Free: The money is typically tax free, since it’s a loan when the homeowner receives the funds, as either additional fixed income or a lump sum.

No Restrictions: How you use the funds received is not restricted - use them however you want, go traveling, get a car, purchase long term care insurance, pay for your children’s college education - anything goes.

Flexible Payment Options: You can receive the loan money in the form of a lump sum, credit line, tenure (lifetime) payment or some combination of the previous.

Easy Pre-qualifications: There are no income qualifications.

Home Ownership: You retain home ownership and the ability to live in your home as you want.

Guaranteed Place to Live: You can live in your home for as long as you want, Guaranteed, no kidding!

Federally Insured: Reverse home mortgages are federally insured - are known as HUD's HECM FHA insured Home Equity Conversion Mortgages (HECM) reverse mortgages. With these, even if the reverse mortgage lenders default, you'll still receive your payments.

No Maximum Loan Amount: for seniors with a large amount of home equity, most lenders offer products with any maximum loan amounts, known as Cash Advantage Accounts.
Disadvantages of a Reverse Mortgage
There are few disadvantages of Reverse Mortgages, but you will want to consider how the following factors might apply to your situation:
Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a reverse mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a Reverse Mortgage.) We can help you with the calculation and make sure your benefits are not disrupted.

You Are Planning to Move in the Near Term: A reverse home mortgage loan is due if your home is no longer your primary residence and generally if you are planning to move soon it is not a good financial tool to use.

Your Home May Not Be Left to the Heirs: Many people dismiss a reverse mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true; a Reverse Mortgage decreases your home equity. However, you can still leave your home to your heirs and they will have the option of keeping the home, refinancing or selling the home. Most heirs (especially siblings) are happy to Mom and Dad do a Reverse Mortgage if it will make their lives better. There are numerous potential Estate and Retirement Planning benefits to a Reverse Mortgage – Give us a call so we can review all the uses & sources to make the uses a reality.

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Why get a Reverse Mortgage and why With Moneywise

I could give you the 10 reasons why you would choose Moneywise, I could tell you thousands of reasons why you should get a Reverse Mortgage, but what good would that do? I don't qualify for a Reverse Mortgage so I don't have one - why don't you check out what some of our clients say about us and their Reverse Mortgage and if you want the 10 reason to choose moneywise click on the link below:

Heres what our past clients have said about us: http://www.moneywise.net/testimonials/nelson.htm

Here are the 10 reasons to choose Moneywise:
http://www.moneywise.net/letters/10reasons.htm

Let me know if you have any questions - I give free information over the phone - let me either confirm or explain what you have heard about the Reverse Mortgage from your friends and family.

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Moneywise
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What can I do with a Reverse Mortgage?

I found these statistics on the top ten reasons seniors get a reverse mortgage according to AARP.

1. Pay off mortgage (20%)

2. Home repairs/improvements (18%)

3. Improve quality of life (14%)

4. Everyday expenses (10%)

5. Emergencies/unexpected (9%)

6. Pay off non-mortgage debts (7%)

7. Health or disability (5%)

8. Property taxes/insurance (5%)

9. Financial help to family (2%)

10. Investments, annuities, or long-term care insurance (1%)
Household chores (1%) (tie)

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Cashin In On Your Home - Reverse Mortgage

It's no surprise that reverse mortgages are becoming popular among seniors
By Leonard Wiener
Posted 6/5/05

For many of today's retirees, a home can seem like Fort Knox without the key. Escalating real-estate prices have caused many seniors' homes to skyrocket in value. But unless they're willing to sell, it may be an inaccessible gain during a time in their lives when extra income and liquid assets would be most welcome. There is a way to tap those profits--a reverse mortgage. "Many seniors are sitting on home equity they never dreamed of," says realty expert Tom Kelly, whose recent book, The New Reverse Mortgage Formula, is a guide to what a growing number of elderly homeowners see as a way to have their home and cash in on it, too.

A reverse mortgage allows a homeowner to borrow against the equity in a home, but unlike a home-equity loan, the loan and interest do not have to be repaid until the home is sold. The loan might be in the form of a line of credit that can increase over time and be drawn on as needed, a lump sum payout, a fixed monthly check for as long as you live in the home, or a mix of options. There is minimal or no upfront cost, as closing and other fees can be wrapped into the loan. The reverse mortgage also pays off any existing mortgage, ending that monthly bite on income. Cleo Dunn, an 88-year-old widow in Leawood, Kan., says the $1,200 a month she receives from her reverse mortgage supplements her Social Security check. That helps her pay medical and other bills while remaining in the home she loves. "I have this most beautiful garden," she says. "I have a life here I could not have anyplace else."

Reverse mortgages have been around for years, but it wasn't until the early '90s that they began earning respectability after the Federal Housing Administration started insuring the mortgages for repayment to lenders. Even so, they've been a niche product; only about 40,000 were done last year. But an aging population is expected to begin tapping into home equity more aggressively. New loans have doubled since 2003. Interest rates on reverse mortgages are mostly about 5.3 percent now but can also be about 6.5 or 8.5 percent, depending on the type and size of the loan.

Bolstering demand are seniors who see the loans not as a lifeline but as a route to a more active life. Francisco and Joanne Santana-Montez of Antelope, Calif., 69 and 68, will use their reverse mortgage line of credit to finance a dream trip to Cancun, Mexico. "Our adviser told us we're spending our kids' inheritance, but our children are delighted," says Joanne.

A prime consideration when getting a reverse mortgage: age. The older you--and a spouse--are, the more cash you can get since the loan will presumably be shorter in duration. A 75-year-old with a fully paid-off $250,000 home in suburban Cleveland, for example, might receive about $917 a month. Or, as is more popular these days, the homeowner would qualify for a line of credit of about $140,000. A 70-year-old Clevelander would nail down less, about $791 a month or a $130,000 line of credit; an 80-year-old would draw more, a monthly check of about $1,099 or a $152,000 line of credit.

Other variables, such as lending limits and interest rates, also determine how much of a home's equity you can borrow. But the homeowner can never end up owing more than the home eventually sells for, even if the sale doesn't cover the borrowing and accrued interest. If a sale more than covers the debt, you (or your heirs) get the excess.

About 95 percent of reverse loans, made by mortgage brokers and banks, are an FHA-insured home equity conversion mortgage, or HECM. The insurance enables HECMs to carry a low interest rate and yield more to borrowers, even with a fee included for the coverage. Impeding some borrowers are geographic limits on the amount of a home's value, regardless of market worth, that will be considered in the calculation. While a value cap of $312,895 applies in the Long Island suburbs of New York, for example, the lid for homes in Iowa is $172,632, according to Ibis Capital, a reverse-mortgage software and data firm in San Francisco. One result: A $300,000 home in Iowa that might qualify for a $100,000 line of credit could get $178,000 if it were in Long Island.

Handy help. Homeowners in costly abodes, perhaps $600,000 and up, may do better with the Cash Account reverse mortgage created by Financial Freedom Senior Funding Corp. in Irvine, Calif. Since there is no valuation cap, borrowing is unlimited. Mortgage giant Fannie Mae offers a reverse-mortgage option with a twist: A senior can buy a new home and get a reverse loan in a single transaction. AARP offers a calculator and a guide at aarp.org/money/revmort to help clarify the choices (and a free booklet for those who call 800-209-8085). Help is also available from Financial Freedom ( financialfreedom.com ) and at reversemortgage.org , the website of the National Reverse Mortgage Lenders Association (866-264-4466 for a brochure by mail).

Reverse mortgages should be utilized with great care. That's why modern loans include consumer safeguards such as counseling. You're eating up equity in the home--funds you may later need for healthcare or sudden bills, or to move to assisted living. Closing costs and fees can make the deal costly if the loan is held for only a few years, especially if you use just a small part of the line of credit or opt for monthly disbursements. If interest rates trend higher, reverse loans will pay less to new borrowers and existing borrowers will rack up heftier interest charges.

Experts say some people may do better selling their home to raise cash and moving to a smaller, less expensive place. Still, being able to stay put when finances might dictate otherwise and discovering you can go to Cancun have a value all their own.

This story appears in the June 13, 2005 print edition of U.S. News & World Report.



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Reverse Mortgage Scenario

Q: My husband and I are retired with a total annual income of $40,000. We owe $145,000 on our home, which is worth $475,000. We don't have any extra to play with. We would like to know whether you would advise us to consider a reverse mortgage.

Jennie

A: A reverse mortgage could pay off your existing mortgage and eliminate the monthly mortgage payments you are currently paying. This could free up some income for you to play with each month.

Here's essentially how it would work. A reverse mortgage would pay off your existing mortgage balance of $145,000. Then, rather than having to make monthly interest and principal payments, the interest charged on the loan would simply add to the balance of the loan.

Let's assume your home will appreciate by 4 percent in the coming years, and the reverse mortgage interest rate averages 6 percent. Ten years from now, your home is worth $703,000 and the balance on the reverse mortgage is $260,000. In 20 years, your home is worth $1,040,000 and the loan balance is $465,000.

When you move from the home, sell the home or pass away, the loan becomes due, and any equity in the home goes to you or your heirs. In the event the mortgage balance is greater than the value of the home, you can walk away from the loan without paying a dime.

In addition to using a reverse mortgage to pay off your existing mortgage, you could also pull out extra cash, secure a line of credit or receive monthly income. Obviously, the more money you pull out, the less equity you'll have in your home.

Unlike a traditional mortgage, the startup costs are high, so you wouldn't want to use a reverse mortgage if you plan to move soon.

A reverse mortgage can be a great option, but for those who want to leave a truckload of money to their kids, paying off a home loan out of retirement income would be a better option.

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Rising cost of fuel and Reverse Mortgages

What is the connection, you might ask between reverse mortgages and the price of oil?

What is the connection, you might ask between reverse mortgages and the price of oil? And if you or a loved one are a senior homeowner age 62 and over but don't drive, maybe you've been thinking that you are lucky because the price of gas and oil really doesn't affect you as much. But the simple truth is that the cost of oil and the rising cost of gasoline affects everyone who has to eat or drink and that includes us all, drivers or not!

Stop and think about it for a minute. Take a look at the price of the food on the shelves in your local grocery stores. That food was trucked in and that requires fuel to get there. When the costs of oil are so high, then it costs so much more to bring those groceries to your local supermarket. And then take a look at the cost of the produce.

With the high cost of oil, many different forms of alternative fuels are being developed and several of these alternative fuels require things like corn to make them. This drives up the cost of not only corn, but everything else that uses corn. That includes feed for almost all other animals and that also drives up the cost of chicken, beef, some dog foods and well, you get the picture! Add to that the floods in the central states where the most corn is grown and the damage to the crops and that means that this year's harvest is going to be smaller and even more expensive.

So how does this all tie to Reverse Mortgages? When you're living on a fixed income, all of this rising cost may be too much to bear. That's where senior borrowers age 62 and over may be able to utilize the equity in their home to meet the rising cost of living in this economic environment.

The government-insured Reverse Mortgage known as the Home Equity Conversion Mortgage (HECM or Heck-um) is designed to allow senior borrowers to access the equity in their home for any purpose. Senior borrowers can use the money to retire existing debt, for medical expenses, to make their homes more senior-friendly, or for any purpose they choose. But this can be especially helpful now that other costs have risen so dramatically.

So whether you or your loved ones drive or not, the rising cost of oil, the increased demand for corn and the flooding and lower crop production is going to take a bite out of everyone's budget. There's just no escaping the far reaching effect that all these factors have on everything else. The reverse mortgage may be just the bridge many senior homeowners can use to cross the rough spots brought on by rapidly rising costs that may be out pacing fixed incomes.

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