By Mike Rowan, 11/23/2009
I have noticed a major uptick in commercials for reverse mortgage income strategies for seniors recently. Many of the catchy taglines include promises that seniors can use their home to generate a lucrative income stream without selling their home. As with any financial planning strategy or tool, the reverse mortgage is right for some, but not for all, and has many predatory and unsavory characters in the business.
What is a Reverse Mortgage?
A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).
In a traditional mortgage the homeowner makes a monthly payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term duration, the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
Requirements for a Reverse Mortgage
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process.
For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. The current lending limit (the maximum the home can be appraised for, no matter how much it's worth) is $625,500. This was increased in 2009, after being raised from $200,000 to $417,000 in 2008. The maximum an originator can charge for a loan origination fee on a reverse mortgage is $6,000.
How Reverse Mortgages Change with the Homeowners Age
Surprisingly, the older the individual is, the more lenient the qualifications become, as the mortality rate increases with age. Once you make application and have been given the proper information and consultation with a seasoned professional, you will be required to attend a counseling session given by a local counselor on reverse mortgages.
These sessions are free of charge and given by a non-profit organization. This allows another opportunity to ask all the necessary and proper questions. During the loan and the remainder of its life, you cannot be asked to leave the property, as you still are the owner and deed holder. This is the case whether you outlast the performance of the loan or not.
How do Reverse Mortgages Affect My Heirs?
As far as your heirs go, they are still entitled to the property upon your passing. The estate will be settled in the normal way, the property will be passed on to the heirs, and they can refinance out of the reverse mortgage. If they decide not to reside in the property, they can sell the unit, pay off the reverse mortgage, and keep the balance of the monies of the estate. They have one year, from the passing of the note holders, to settle the mortgage
