I have found there is a TON of misunderstanding around reverse mortgages.
1. What do you think a reverse mortgage is?
2. How do you think it works?
3. Why do you think it is good/bad?
You must answer all three to be considered for best answer.
Reverse mortgage is a funding option that gives senior citizens a payout now without a mortgage payment
Reverse cashes out home value now; leaves repayment to estate, or by sale of home after death of lender
Good; instant cash with no repayment worry
Bad; estate loses house as an asset or has to repay mortgage.
My dad is 60 years old, he wants to retire in 2 years at age 62. He bought a $200k home couple of years ago, if he applies for Reverse Mortgage, does he have to make payments on his property?
All borrowers that live in the home (generally husband and wife) must be 62 years of age or older.
A calculation is used based on the value of the home, age of the occupants, and if there is an existing mortgage on th ehome to arrive at a ‘cash’ value a reverse mortgage will provide.
This type of mortgage works BEST, when the borrowers are older and they own the home fre and clear.
The reason for this, the reverse mortgage has no repayment conditions until all borrowers in the home pass away or vacate the property as the primary residence.
At that time, the reverse mortgage must be satisfied. Generally, the surviving children either ‘buy’ the mortgage and sell the property or use the property for other reasons.
The formula used to calculate how much a reverse mortgage can provide is the closer to age 62, the lower the percentage of value. Reasoning behind this is the bank has to ‘carry’ that note without benefit o finterest income duringth elife of the borrowers. Since we, as a nation, are living longer, that banks expects the borrowers to live at least 20 years. That generates a percentage of value somewhere in the neighborhood of 25-30%. In your example, 200,000 would net you 60K if you had no exisitng mortgage. However, if the borrowers were 80, the formula s more favorable and the percentage would be somewhere in the 50% value range. Which again, using 200,000 would be 100K. The location of thepoerty also will influence the percentage.
As a mortgage lender, this product is used occassionally when the circumstances work. Sometimes, the borrowers are better off selling and downsizing. All options that should be considered. If you do elect this option, counseling by a third party is mandatory. All reverse mortgages are underwritten using HUD guidelines, Financial Freedom is one of the largest reverse mortgage providers.
As a bank, we sell this product. The great thing about reverse mortgage, all fees are governed by HUD, so going with one lender vs. Another will not cost you more or less. So you really choose to do business with a professional that you feel comfortbale with.
Hope this helps,
Call with any questions.
what is a reverse mortgage
Ok, these other folks are a bit off. Here’s a more accurate explanation.
A reverse mortgage is special type of home equity loan usually for persons 62 years of age or older. Reverse mortgages allow owners to convert some of the equity in their homes to cash. As opposed to a regular mortgage, where you borrow money from a lender and pay it back over time with interest, a financial institution is making payments to you. Usually the payments are for life or for joint-lives in the case of an elderly couple. It is essentially an advance loan made against the equity in your home.
The loan does not usually have to be repaid during the homeowner’s lifetime. When the person dies, the home does not necessarily go to the financial institution. The home is usually sold and some (or all) of the proceeds are used to pay the loan amount of the reverse mortgage. Reverse mortgage payments are not taxable and do not affect the homeowner’s Social Security or Medicare benefits.
What reverse mortgage company should I work for?
I’ve been looking into these a lot lately, but I’m having a hard time deciding what company to work with. Anyone work for one – or have a reverse mortgage – that they can recommend?
No, but before you take one read everything about them on HUD.GOV and AARP. They can’t be undone so you are stuck with them for life.
Since you are young enough to use the internet you are too young to know your entire future. I won’t consider one before 85 because so much can happen between 62 and death. You could be widowed, remarry, decide to move to a warmer or cheaper place, move in with a SO, move in with the kids or not want a house and want to move to an apartment. With the reverse mortgage you won’t have as many choices since you have to pay off the debt before you can move.
How does a reverse mortgage work?
How does a homeowner benefit from a reverse mortgage?
Does he get paid every month more than he’s currently paying on his mortgage (giving him extra cash per month)?
Does the lender bet on the house appreciating after the borrower dies?
Why would anybody want to pay or buy a house from a person who still lives in there (which they cannot utilize until this person dies)?
Is reverse mortgage designed for people who have nobody to give their houses to when they die?
Before anything else, Debdeb has good info (except that some co-ops in very limited areas are allowed). The first 3 have a lot of errors (FredF, MVD34, and Think About It). To answer your five questions:
1) Benefit: the only way to access the equity in your home is to either sell it or get a loan like a Line of Credit (LOC). The benefits of a RM over a standard LOC are that:
you don’t have to qualify, other than age
you don’t have to make monthly mortgage payments for as long as it is your primary residence
it is open ended (you can live there as long as you want, even when the money runs out)
there is no pre-payment penalty
they cannot foreclose on you based on non-payment of mortgage (because there is none required)
2) Once a senior gets a RM, all requirements of a monthly mortgage payments stop. What he normally would be paying back to the bank each month like with a LOC instead is added on to the principal balance, so it is a negative amortization loan. The loan gets bigger every month. If he wants to pay it back monthly, he still can with the adjustable program – it just defeats the purpose (almost). If there is sufficient equity to pay off all liens on the house (not credit card bills) when he applies and still have some left over, then the remaining funds can be taken out as a lump sum, monthly draw, LOC which grows monthly, or combination of the three.
3) absolutely. Although it is more HUD betting, then the lender, because the lender always gets paid. The bank can only get repaid what it is owed (original principal plus accrued interest, accrued monthly mortgage insurance premium, and accrued monthly servicing fee, if any) or what the house sells at, whichever is lower. If it sells for more than is owed, the heirs get the difference. It is a non-recourse loan so the bank cannot go after any other assets or the heirs. And if when the senior decides to sell or passes away the home has not appreciated (underwater like so many homes nowadays), then the bank is made whole by the mortgage insurance that HUD requires the senior to pay (upfront and monthly, added on to the principal balance). The bank never loses; it just has to wait for an undetermined number of years before it gets paid back. Who may lose is HUD, if they are not careful with how they maintain/invest all the mortgage premiums they have collected from all the seniors through the years.
4) the bank doesn’t care about the “house.” they are not buying the house. They are not into physical real estate. They don’t intend to utilize it. They are simply (i know, nothing is simple) making compounded interest on what they are lending up front, and are guaranteed to get paid back in a lump sum, with a guarantee from HUD, regardless of what happens to the home or it’s value. It’s similar to insurance (but in reverse). Based on longevity tables, they can more or less predict their cash flow.
5) no. It is designed to allow seniors to remain independent, self-sufficient, and prosperous in their own homes using all their assets. I dare say most seniors were not given their homes by their parents; why an offspring assumes they are entitled to a house is beyond me. Fwiw, some seniors do not need the income, and many have children. These seniors sometimes use the RM income to build wealth, e.g. Buy a 2nd home (which the kids will also inherit), buy rental income to augment their retirement portfolio (which the kids will also inherit), preserve their cash investments.
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