Creative Financial - The Easy Way Home
A New Kind of Loan: In Reverse
A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:
- all at once, in a single lump sum of cash;
- as a regular monthly cash advance;
- as a "creditline" account that lets you decide when and how much of your available cash is paid to you; or
- as a combination of these payment methods.
No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.
Other Home Loans
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So you don't need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.
With most home loans, you could lose your home if you don't make your monthly payments. But with a reverse mortgage, there aren't any monthly repayments to make. So you can't lose your home by not making them. Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:
- you don't need an income to qualify for a reverse mortgage; and
- you don't have to make monthly repayments on a reverse mortgage.
You can see how a reverse mortgage works by comparing it to a "forward" mortgage — the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways. "Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage, your home equity is $120,000. When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional "forward" mortgage loan every month over many years. During that time:
Falling Debt, Rising Equity
- your debt decreased; and
- your home equity increased.
As you made each repayment, the amount you owed (your debt or "loan balance") grew smaller. But your ownership value (your "equity") grew larger. If you eventually made a final mortgage payment, you then owed nothing, and your home equity equaled the value of your home. In short, your forward mortgage was a "falling debt, rising equity" type of deal.
Rising Debt, Falling Equity
Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:
- your debt increases; and
- your home equity decreases.
It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate. When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan. In short, a reverse mortgage is a "rising debt, falling equity" type of deal. But that is exactly what informed reverse mortgage borrowers want: to "spend down" their home equity while they live in their homes, without having to make monthly loan repayments. There's more about this important concept in an article called "A 'Rising Debt' Loan" in the Basics section of this site.
Reverse mortgages don't always have rising debt and falling equity. If a home's value grows rapidly, your equity could increase over time. Or, if you only get one loan advance and no interest is charged on it, your debt would never change. So your equity would grow as your home's value increases. But most home values don't grow at consistently high rates, and interest is charged on most mortgages. So the majority of reverse mortgages end up being "rising debt, falling equity" loans.
Homeowners Need Reverse Mortgage Loans to Pay For Everyday Expenses
Amid the loan market crisis, more seniors are turning to reverse mortgages.
Source :PR Newswire
April 3, 2008
The survey was conducted in January by Consumer Credit Counseling Service of Greater Atlanta, Inc., a credit counseling agency that provides reverse mortgage counseling. The homeowners average 74 years old and have lived in their homes an average of 18.5 years. The average purchase price of their homes was $95,554 and the respondents said that the current value of their homes was approximately $221,997. More …
Reverse mortgages provide more seniors with a safety net
By Patrick S. Duffy
Special to The Times
February 24, 2008
IMAGINE a scenario in which, instead of struggling to come up with the money for a mortgage payment that's resetting to a higher level, you could tap the unused equity in your home not only to pay off that loan but also to have money for living expenses, remodeling, traveling or even investing in a vacation home. For seniors, there is such an option: the reverse mortgage. More …
Predators of Reverse Mortgage Proceeds, How to Avoid a Scam
By Peter G. Miller
January 15th, 2008
You hear about reverse mortgage horror stories with some frequency — more frequency than ought to be the case. An elderly person gets a reverse mortgage and then gets scammed into an “annuity” with weak terms and terrible prepayment penalties.
W.L. Pulsipher Says:
January 15th, 2008 at 8:00 pm
American Reverse Mortgage (ARM) was the first and still probably the only Lender to prohibit by contract the selling of annuities by our Advisors with the proceeds of a Reverse Mortgage. More …
2007 FannieMae National Loan Limits will remain at $417,000. Please contact your ARM Advisor for additional information.Through March 31, 2008, more than 401,218 Senior Americans have taken advantage of an FHA Home Equity Conversion Mortgage (HECM). Stay tuned for next month's total!
History of Reverse Mortgages
The Reverse Mortgage became a valuable and safe tool for Senior Americans when the United States Congress authorized the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM).1) The United States Congress passes FHA Reverse Mortgage Legislation, the Housing and Community Development Act of 1987, (S. 825) on December 22, 1987.2) President Ronald W. Reagan signs FHA Reverse Mortgage Legislation (S. 825) on February 5, 1988.3) First FHA Reverse Mortgage made to Marjorie Mason, of Fairway, KS by James B. Nutter & Company on October 19, 1989.Another program became available in 1996 when the Federal National Mortgage Association (FannieMae) created the Home Keeper.The Independence Plan (TIP) announced at the ARM 2007 Annual Meeting on January 27, 2007, is a Jumbo Reverse Mortgage with no upper maximum.
These three (3) Reverse Mortgages offer the opportunity for virtually all Senior Citizens to utilize the equity in their homes to provide needed financial security. Since 1989, more than 391,555 Seniors have obtained an FHA HECM.
The American Association of Retired Persons (AARP) publishes a book (52 pages) titled "Home Made Money: A Consumers Guide to Reverse Mortgages". It is also available in Spanish, "Dinero Hecho En Casa".The American Bar Association (ABA) publishes a book (292 pages) titled "Reverse Mortgages - A Lawyer's Guide to Housing and Income Alternatives".
The Federal National Mortgage Association (FannieMae) publishes a book (96 pages) titled "Money From Home - A Guide to Understanding Reverse Mortgages". FannieMae provides a four (4) page "Home Equity Conversion Mortgage (HECM) Consumer Fact Sheet".
FannieMae provides a (4) page document titled "Considering a Reverse Mortgage? Review These 5 Steps to See if One is Right for You". FannieMae also has a (4) page "Home Keeper Consumer Factsheet".
The National Council on Aging (NCOA) publishes a study (104 pages) titled, "Use Your Home to Stay at Home", and two new booklets "Use Your Home to Stay at Home: A Planning Guide for Older Consumers" (20 pages) and "Use Your Home to Stay at Home: A Guide for Homeowners Who Need Help Now" (24 pages)
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