Dollars and Sense
What is a Reverse Mortgage?
By Mark Lepzinski, Starpointe Mortgage (Mlepzinski@starpointeflorida.com)
Apr 28, 2007 - 9:55:33 AM

What is a Reverse Mortgage?

A reverse mortgage is a unique loan program that enables senior homeowners that are age 62 and older to use their equity without creating a monthly payment obligation. The majority of our Reverse Mortgage Programs are guaranteed by the U.S. Government.

A reverse mortgage provides financial security because you do not have to make payments or repay the loan as long as you occupy your home as a primary residence. Thus, the reverse mortgage program enables seniors that may be "real estate rich and cash poor" to unlock the financial potential in their homes, and let their homes work for them. Additionally, the reverse mortgage has no income or credit requirements to qualify.

In general, the reverse mortgage does not become payable until the senior homeowner no longer occupies the property as his or her primary residence.

Thus, the reverse mortgage is simply a loan against the borrower's principal residence. The borrower retains ownership of the home. If the borrower decides to sell the property, any funds in excess of the payoff amount belong to the borrower, as is the case with a regular mortgage or home equity loan.

WHO IS ELIGIBLE FOR A REVERSE MORTGAGE?

Reverse mortgages are available to homeowners that are age 62 and older. All persons listed on the deed to the property must be at least age 62. The borrower must occupy the property as his or her primary residence and all existing liens must be paid off at the time of settlement. Thus, the proceeds of the reverse mortgage are available to pay off any outstanding mortgages against the property. As an additional safeguard, the Department of Housing and Urban Development (HUD) requires that each potential reverse mortgage borrower be advised about the reverse mortgage program by an independent HUD-approved counseling agency. This counseling is free of charge to the borrower.

Common Questions:

What is a reverse mortgage or senior citizen mortgage?

- A Reverse Mortgage is a loan that enables a "senior" homeowner, having attained the age of 62 or older, to convert part of the equity in their home to tax free income without having to give up title or take on a monthly payment.

How do I qualify for a reverse mortgage?

- You must be at least 62 years of age, own, and have equity in your home and it must be your primary residence. There are no income, credit or health requirements to qualify.

What if I already have a mortgage or other debt on my home?

- The mortgage and or debt will be paid off from the proceeds of the Reverse Mortgage loan. Your Reverse Mortgage will then be based upon the remaining equity in your home.

How will the income from the Reverse Mortgage affect my taxes, social security or other benefits?

- Proceeds from a Reverse Mortgage are not taxable, it's your money (equity), not taxable income. Nor will your regular Social Security or Medicare be affected. The impact, if any, on other federal, state or local assistance programs should be discussed with your financial advisor or the program sponsor.

How much money can I borrow?

- This depends upon borrower's age, market value and equity in the home and the interest rate at the time of origination.

Are there payment options?

- Yes. You can choose to receive fixed monthly payments for as long as the home is your primary residence or, a lump sum payment, a line of credit or any combination of the above.

THE REVERSE MORTGAGE PROCESS

Who will own my home after I get a Reverse Mortgage?

- You will continue to own and have title to your home just as with a regular mortgage.

How much will it cost to get a Reverse Mortgage loan?

- Many of the same costs of a regular home mortgage apply to the senior citizen Reverse Mortgage. The charges will include an appraisal and credit report fee, termite inspection, origination fee, mortgage insurance fee (for FHA/HUD Home Equity Conversion Mortgages (HEMC), monthly servicing fee and other standard recording or closing costs. In most instances these fees are capped, financed as part of the Reverse Mortgage and taken out of the loan proceeds at the closing.

Will a formal appraisal be required to get a Reverse Mortgage?

- Yes. The value of your home is one of the factors which will determine how much money you can receive. We will order the appraisal which is normally paid for by the borrower upon application.

Will I need an attorney to get a reverse mortgage?

- An attorney is not required but we encourage the borrower to seek advice from a family member and/or legal, tax or financial advisor before committing to a Reverse Mortgage.

Will I be required to receive counseling before I can get a Reverse Mortgage?

- Yes. Counseling is required and this educational session is designed to inform you and reconfirm the mechanics of Reverse Mortgage. We will provide you the name and phone number of an approved Reverse Mortgage counselor.

THE REVERSE MORTGAGE PHASE

Will I be required to make any payments when I have a Reverse Mortgage?

- No. The lending institution pays you. You are responsible for real estate taxes, homeowners insurance and the upkeep of the property.

Are there any restrictions on the use of the money from the Reverse Mortgage loan?

- None whatsoever. You can use the proceeds to pay off medical bills, purchase or pay for health insurance or health care, life insurance, repair your home, purchase a second home, pay for college tuition for your grandchildren, travel, put it in the bank or use it anyway you choose.

Must I make monthly mortgage payments?

- No. There are no payments so long as the owner(s) continue(s) to occupy the home as their primary residence. The homeowner is only responsible to maintain the home, pay for insurance and property taxes.

Can one of the owners remain in the house if the other moves out or passes away?

- Yes. The last primary resident to vacate the home triggers repayment of the loan.

Will a temporary non-occupancy cause the Reverse Mortgage to become due?

- Non-occupancy of your principal residence for more than one year will cause the Reverse Mortgage to become due.

AT THE END OF THE REVERSE MORTGAGE

When must the loan be paid off?

- When the home is no longer the primary residence of the owner, the owner sells the home, or the owner dies.

Do my heirs have to sell the house to repay the Reverse Mortgage?

- No. They can repay the balance due on the Reverse Mortgage and keep the home. If they choose to sell the home they keep the excess proceeds of the sale after satisfying the mortgage.

Are my heirs responsible for the Reverse Mortgage if it exceeds the value of the home?

- No. Your estate is not responsible for this mortgage. This is a non- recourse loan.

Will my estate have to pay taxes on the proceeds I received from the Reverse Mortgage?

- No. The proceeds are tax free. (But please consult with your tax advisor).

How much will be owed at the end of the Reverse Mortgage?

- The amount borrowed, the accrued interest, the mortgage insurance premiums accrued, services fees and any of the costs or fees financed as part of the Reverse Mortgage. There are no prepayment penalty fees.

THE REVERSE MORTGAGE AS AN ESTATE PLANNING TOOL

Can a Living Trust or other form of trust take out a Reverse Mortgage?

- Yes, but subject to the conditions of the trust document. The entire trust document must be made available to the lender in order to approve the Reverse Mortgage loan and in a manner that maintains the integrity of the trust.

Will any other part of the homeowner's estate be responsible for the Reverse Mortgage debt?

- No. The Reverse Mortgage loan is non-recourse even if the equity is less than the amount due.

Can the accrued interest be used to benefit the estate?

- Yes. In many instances this may be the case but you should consult with your legal or tax advisor regarding these or other tax implications.

Are the proceeds of the Reverse Mortgage tax free, even if taken as one lump sum?

- Yes. But please consult with your financial advisor.

Can the proceeds be used as a retirement or estate planning tool to purchase annuities, life insurance, prepaid health insurance, etc. or any combination thereof?

- Yes. The use of the proceeds is at the discretion of the borrower and/or the direction of the borrower's financial or legal advisors. The use of the proceeds of the Reverse Mortgage is limited to the creativity and needs of the borrower.

General Comments

- The Reverse Mortgage may be used to provide funding for healthcare or medical treatment.

- It may reduce the impact of estate taxes through the purchase of various other insurance products.

- It may maximize the legacy of estate transfer.

- It may lower the total estate value subject to taxes.

- It may create estate deductions thereby enhancing the net value of the estate.

- It could provide an added element of control to the estate plan.

- The proceeds of the Reverse Mortgage are tax free. (Consult your financial advisor or tax attorney).

COSTS ASSOCIATED WITH THE REVERSE MORTGAGE

How much will it cost to get a Reverse Mortgage loan?

- Many of the same costs of a home purchase mortgage apply to the Reverse Mortgage. The charges will include an appraisal fee, termite inspection, origination fee, mortgage insurance fee (for FHA/HUD Home Equity Conversion Mortgages (HEMC), monthly servicing fee and other standard recording or closing costs. In most instances these fees are capped, financed as part of the Reverse Mortgage and taken out of the loan proceeds at the closing.

- An appraisal fee may be charged at the time of the application process.

- There is no application fee.

- There are no "points" to the borrower.

- There is no processing fee.

- No "junk" fees

Important Considerations for Reverse Mortgage

There are important things to look for when choosing a Reverse Mortgage company. With traditional mortgages your decision is based primarily on obtaining the lowest interest rate. Reverse Mortgages are a different story, as the interest rate does not vary from one company to the next. And with very few minor exceptions, the fees and expenses are the same as well.

Starpointe Reverse Mortgage is a nationwide association of Reverse Mortgage consultants. Our knowledge and experience will provide the information you need in deciding if a reverse mortgage is the right option. To request our free educational video package visit us at:

http://starpointeflorida.com or E-mail Mark at Mlepzinski@starpointeflorida.com

You will be glad you did!