REVERSE MORTGAGES GET BETTER
New rules allow seniors to borrow more and even buy a new home
By Mary Beth Franklin, Kiplinger's, October 29, 2008

Retirees concerned about their decimated savings should take a second look at reverse mortgages. Beginning November 1, 2008, homeowners everywhere may borrow up to $417,000. Previously, the Home Equity Conversion Mortgage program assigned various lending limits, ranging from $200,160 in rural areas to $362,790 in the most expensive housing markets.

Existing reverse-mortgage borrowers may be able to refinance their loans to take advantage of the higher lending limit. Plus, the new rules cap the origination fee, previously set at 2% of the loan value, at $6,000.

And, in a major policy change, retirees will be able to use a reverse mortgage to buy a new home starting in 2009. "This provision could really transform the industry," says Peter Bell, president of the National Reverse Mortgage Lenders Association, in Washington, D.C.

How it works

With a reverse mortgage, homeowners 62 or older can tap the equity in their home in the form of a lump sum, line of credit, monthly payout or a combination of all three. You retain the title to your property and must continue to pay property taxes, insurance premiums and home-maintenance costs.

Payouts are tax-free, but the income you receive may make you ineligible for certain state and federal benefits, including Medicaid, which is a major payer of nursing-home costs.

A reverse mortgage need not be repaid until the last homeowner moves out or dies, at which point the home may be sold to pay off the debt. Interest and fees accrue over the lifetime of the loan and could wipe out any remaining equity. But the loan-repayment amount may never exceed the market value of the home; even if home prices decline, your heirs cannot be held responsible for any shortfall.

Retirement-income solution

John and Phyllis Harper decided to take out a reverse mortgage to tap the equity in their paid-off home near Denver, valued at about $300,000. They're using the money to finance about $60,000 worth of needed improvements and to boost their monthly retirement income. "We can do some extra things now, such as travel," says John, 75, who enjoys working in his home sculpture studio and cruising in his '82 T-top Corvette. "We discussed it with our children and they said, 'It's your money -- enjoy it,'" says Phyllis, 72.

As baby-boomers move into their retirement years with fewer pensions, inadequate savings and increasing health-care costs, reverse mortgages are well positioned to serve as a financial solution, says Brian Montgomery, commissioner of the Federal Housing Administration. Bell agrees. "We expect the growth of reverse mortgages to accelerate as seniors look for additional sources of income," he says, "and because the new provisions of the Homeownership Act of 2008 broaden the market and make them more attractive." ...

Buying a new home

Although the Department of Housing and Urban Development hasn't officially announced the change, new rules allowing a reverse mortgage to be used to buy a home are expected to take effect January 1, 2009. Like traditional reverse mortgages, the maximum loan amount will be based on a combination of the value of the home, the homeowner's age and prevailing interest rates.

Say an elderly couple lives in an old, two-story house. The house needs repairs, and they're having a hard time negotiating the stairs. Instead of having to stay in a house that no longer meets their needs, they could sell the old house and use a reverse mortgage plus cash to buy a new, single-story home.

Here's how it works.

Assume the couple's current home is worth $700,000, and they want to downsize to one that costs $500,000. If they pay cash, which many seniors choose to do, they'll have $200,000 left to live on. But if they use a reverse mortgage to cover some of the purchase price -- say, $200,000 -- and pay the $300,000 balance with proceeds from the sale of their old home, they'll double their cash reserve to $400,000 without ever having to worry about repaying the reverse mortgage while they live in the house.

Beware of scams

But reverse mortgages also have a dark side. In recent years, some unscrupulous lenders have pressured elderly borrowers into using their newfound cash to buy annuities and other financial products that imposed high fees and limited access to their money. The new rules prohibit lenders from requiring reverse-mortgage borrowers to purchase additional products or services as part of the loan agreement.

In a recent investor alert, the Financial Industry Regulatory Authority, or Finra, warned seniors to consider all of their options carefully before committing to a reverse mortgage. "Home equity is often a homeowner's most valuable asset and most precious source of retirement security," the Finra alert states. "Consider all the risks and explore all of your options before taking out a reverse mortgage, and even then, use the loan funds wisely.

COMMENTS:

POSTED BY: wealthone (October 30, 2008 10:41 AM)You nailed this post, we wrote the same thing on reverse-mortgage-information.org, so we're glad that other folks understand. It really is an amazing program that anyone 62 and over interested in purchasing a home needs to know about.

POSTED BY: Ernie Castro (October 31, 2008 01:06 PM)Reverse mortgage for purchase will revolutionize how seniors finance their homes in the future. With no credit and income restrictions, this product will become the smoothest way for people in the last quarter of their lives to finance their homes


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Reverse Mortgage: Pop quiz might help calm concerns
Posted by News and Resources about Reverse Mortgages
On November 3rd, 2008

The misconceptions surrounding reverse mortgages continue to be a stumbling block keeping many seniors from taking advantage of this remarkable product. In an effort to help dispel some of the myths about reverse mortgages, I offer the following pop quiz. The answers are simply true and false responses followed with a brief explanation.

Reverse mortgages are only available to seniors older than 70 years of age - false.

The minimum age requirement is that both spouses be at least 62 years of age.
• If I obtain a reverse mortgage I no longer own my home - false.

The key to understanding this concept is the word “mortgage.” A mortgage places a lien against a property and the truth is that in order to obtain a reverse mortgage the property must be in and remain in the name of the borrowers only. The property must be maintained and taxes and insurance must be kept current, but the lender does not own your home.

• A reverse mortgage makes it easier for your home to be sold out from under you - false.

Here again the key word is “mortgage.” Like any other mortgage, a reverse mortgage places a lien on the property and is in the name of the borrowers. Nothing can be done with your property without your knowledge and consent.

• My heirs will be saddled with the loan - false.

A reverse mortgage is a “non-recourse” loan. This means that the lender only can derive repayment from the proceeds of the sale of the property...This is true even if the home’s value has decreased or the borrower lives to an extremely old age...[or the amount of the loan exceeds the value of the home. If this happens, then FHA pays the difference to the lender].

• If I receive a reverse mortgage my home goes to the lender at my death - false.

Any value or equity remaining after the loan is repaid goes to the estate or the heirs of the borrowers. This means that if the home appreciates in value, the value or equity going to the heirs can be significant.

•Bad credit, low income or failing health can keep me from getting a reverse mortgage - false.

A reverse mortgage has no credit, income or health requirements. Since no repayment is made on a reverse mortgage as long as one surviving spouse remains in the home, there are no income or credit requirements.

• I have a current mortgage. Doesn’t that keep me from seeking a reverse mortgage? - No.

You may have a mortgage or other debt against your home and still obtain a reverse mortgage. All existing debt [on the property, only] must be paid off with the proceeds of the reverse mortgage but any remaining funds are yours to access.

• So if I get a reverse mortgage don’t I have to take the money in a lump sum? - No.

There are five options available for you to receive the proceeds of a reverse mortgage.

1) Tenure: Equal monthly payments as long as at least one borrower lives and continues to occupy the property as their primary residence.
2) Term: Equal monthly payments for a predetermined number of months chosen by the borrower.
3) Line of credit: Unscheduled payments or in installments, at times and in the amounts of the borrower’s choosing until the line of credit is exhausted.
4) Modified tenure: A combination of line of credit with monthly payments for as long as the borrower remains in the home.
5) Modified term: Combination of line of credit with monthly payments for a predetermined number of months chosen by the borrower.

• The money I receive from a reverse mortgage can negatively impact my Social Security or Medicare - false.

Reverse mortgage proceeds are not taxable because they are not considered income but are, in fact, a loan.

And since the U.S. government sets Social Security, Medicare, and FHA reverse mortgage rules, they all have been made compatible.

It must be stated, however, that Supplemental Security Income and Medicaid may be affected if you exceed certain liquid asset amounts. Consult your reverse mortgage provider for these figures.