Reverse Mortgage to supplement income:

compliments of ElToro ... see also Developing a long-term investment plan

A Reverse Mortgage is a financial product available to senior homeowners that can be used to supplement retirement income. Unfortunately Reverse Mortgages are complex financial products that are frequently misunderstood and therefore under utilized. Consumers unfamiliar with any terms in this material should consult a Reverse Mortgage Glossary for a definition. AARP has extensive information on what to consider when Exploring Reverse Mortgages and a 72-page pamphlet titled "Home made money". Borrowers should consider using federally insured loans to help avoid Reverse Mortgage fraud.

As with any contract, make sure you understand the terms prior to signing!

Who should consider a Reverse Mortgage?

Reverse Mortgages are designed for seniors over age 62 who are house-rich but cash-poor and desire to remain in their home. Seniors having substantial home equity and wanting to remain in their home should consider a reverse mortgage to be used to supplement retirement income or structured to provide funds for unexpected needs. Reverse Mortgages are not recommended for seniors who have adequate investments or savings and eventually plan on moving.

A Reverse Mortgage enables seniors to convert part of their home equity into tax-free income without having to sell, give up title, move out or make monthly payments. However, it could conceivably affect eligibility of Supplemental Security Income and benefits in some states and therefore a tax advisor should be consulted.

What is a Reverse Mortgage?

A Reverse Mortgage is a non-recourse loan, which means the repayment amount cannot exceed the value of the home. The loan typically does not have to be repaid until the borrower passes away, sells the house or permanently moves out. The owner is still responsible for insurance, taxes and maintenance of the property. When evaluating reverse mortgages, determine

  • How much do you receive and when?
  • What are the costs (rates and fees)?
  • What happens at the end of the contract?

    Avoid loans where the loan balance becomes due and payable for term loans!

    How much you get is calculated using a formula that takes into account:

  • Life expectancy of the borrower(s)
  • Value of the property (equity)
  • Location of the property
  • Prevailing interest rates

    However, there are 203-b loan limits for the maximum amount of a Reverse Mortgage which range from as little as $100K to more than $250K depending on the product and geographic region. Online Reverse Mortgage calculators are available at AARP and Reverseweb.com for loan estimates.

    The borrower can receive payment in the following forms:

  • Term - Monthly payments for an allotted period of time
  • Tenure - Monthly payments continue for as long as you live in your home
  • Line of credit - A lump sum available to be drawn on as needed
  • Modified Tenure - Monthly payments continue for as long as you live in your home along with access to a line of credit

    The two most popular Reverse Mortgages are the Home Equity Conversion Mortgage from HUD and the Home Keeper loan from Fannie Mae and are available in most states. Both products are federally insured which protects the consumer should the lender default.

    As with other loans, consumers should shop around for the terms and conditions which best meet their needs as there can be substantial differences between loan amounts offered by various lenders. The best way to compare the cost of competing loans is to use the Total Annual Loan Cost (TALC) required by the federal Truth-in-Lending law (Reg.Z) that serves as the fundamental disclosure for alerting borrowers to the total cost of a reverse mortgage.

    References

    "Reverse Mortgages for Beginners" by Ken Scholen
    National Center for Home Equity Conversion (NCHEC)
    FAQs
    consumer tips
    Q&A
    counseling
    See also: Canadian Home Income Plan (CHIP)   and some charts