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Reverse Mortgages - An income alternative 

by Mary Lynn Isaacs

Reverse Mortgages are a special kind of home loan that is only available to older Americans, and they follow special advantageous reverse mortgages rules that have been established by the U.S. Federal government.  

Someone that meets the qualifications of the reverse mortgage rules can pick up an additional income source, not have to worry about qualification, repayment of the mortgage, and essentially obtain double personal value for their equity.  

A reverse mortgage is a financial arrangement that allow the owner to sell their home to the bank over time, have the bank make payments to the homeowner instead of the other way around, and still retain ownership. The net effect is that a reverse mortgage can offer you a substantial source of regular income, yet you can live in your home for the rest of your life regardless of how old you live.  

Prior to the idea of reverse mortgages, there were only two ways that anyone could leverage their equity.  The first was to obtain a traditional mortgage that had to be repaid with monthly mortgage payments.  

The second was to sell the house and live elsewhere.  

Many people without any income didn't qualify for the traditional mortgage because they had no way to pay it back.  Those that chose to sell the house had to give up there home.  

Reverse mortgages are the combination of all of the positives with none of the negatives.  There are no payments that are required, you don't have to income-qualify, and it is the bank that takes the financial risks.  

Reverse Mortgage Proceeds

The first question most people ask about reverse mortgages relates to how much money they can get.  This varies depending of course on how much your home is worth, what your equity in that home is, and how old you are.  However, there is a formula to determine this so one bank isn't going to offer you any more than any other bank.

There may be some instances when going through the reverse mortgage process isn't worth it to the bank.  If you might only be able to access a couple of thousand dollars, most financial institutions just aren't interested in this small of a deal.  Most have limits and may not write any loans less than $5,000 - $10,000.  This isn't so much a qualification of the reverse mortgage process as it is meeting the minimum standards set by the financial institution.  

Your home must have market value.  If it is in such a state of disrepair that it can't be sold, don't expect the financial institution to give you the reverse mortgage unless you plan to put that money back into the house and increase its value and ability to be sold.  

Because you are allowed to stay in your home for the rest of your life, the time value that is associated with money means the younger you are, the less money that you will receive for your home.  Where a 62 year old person may receive only 30% of the value of their home, someone who is 95 could receive as much as 80% of the value of their home.

You must also have substantial equity in your home to obtain a reverse mortgage.  The minimum equity in the home would be defined according to the above factors. If you are 62 and only have 20% equity, a reverse mortgage probably isn't in your immediate future.  

Reverse Mortgage Qualifications

Not everyone can qualify for a second mortgage.  Any of these is a deal-breaker and there's just not much that can be done to make you qualify if you don't.  

1)  You must own your home and have substantial equity in it.  A reverse mortgage is a delayed process of selling your home where the buyer doesn't take possession until you move out or die.  As such, you of course cannot sell something you don't own and nobody will give you a loan if you already owe too much on it.

2) You can only obtain a reverse mortgage on your primary residence where you live.  Vacation homes, land, timeshares, and business property do not qualify for the reverse mortgage program.  

3) You must be 62 or older.  The older you are, the more you can get on your reverse mortgage.

4) You must meet with a HUD agent before you can apply.  That way you will have all the answers to make an informed decision

5) You may stay in your home as long as you can or wish to and never make a payment against the reverse mortage.  If you sell your home however, the loan must be repaid from the proceeds.

Important Facts About Reverse Mortgages

1) You will never have to make a payment on a reverse mortgage.  

2) You can take the money in a variety of ways including a one lump sum settlement, a standard amount annuity payment for life, a fixed amount for a 10 year period, or as a credit line so that you can choose what to take and when.  You may also select various combinations of these options.  

3) Your income has no bearing on your ability to qualify.  Whether you are working full-time, living on substantial savings and investments, living only on Social Security, or have no income at all, your income is irrelevant to your qualifications to getting a loan.

4) You will not pay income tax on the proceeds of your loan no matter how much it is.  This is non-taxable income.  It can however, be added to your income for qualifications for other things such as to apply for a different kind of loan or credit card.

5) You can use the money in any way you want.  It's your money and if you want to go on vacation, use it for medical expenses, give it away, or just live on it, that's up to you.  

6)You will never be forced to move out of your house because of anything to do with a reverse mortgage.  If you retire at age 62 and live in your home into your 100's, you may still live in your home.

7) You are still responsible for the taxes, insurance, maintenance, and repairs on the house.  You still own the home just as you did when you had your house purchase mortgage.  Ownership does not transfer to the financial institution until you and your spouse die or you sell the house.  Selling your house is still entirely up to you and you can do it whenever you want.

8) If you die before you receive all your benefits, only the mortgage and accrued interest will be subtracted from the proceeds from the sale of the residence out of your estate.  In effect, you don't gamble away your rights to ownership if you die early.

9) Proceeds from the reverse mortgage will not affect your Social Security, Medicare, retirement packages, or anything else.  You are simply accessing cash that is tied up in the value of your home.

10) Interest rates can vary, but this does not affect your monthly payments from the bank.  

11) There is zero to minimal out of pocket expenses to you because closing costs can be incorporated right into the loan.

No other generation before this has had the opportunity to participate in anything like a reverse mortgage.  If you own your house or even just have substantial equity in it, there's just no reason for you to be house rich and money poor, or to have to decide between selling your home to have enough to live on.  

 

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