Are you a senior citizen homeowner at least age 62 who could use additional tax-free income? If not, perhaps your elderly parents might be interested. Or, are you at least 62 and would like to retire, but you know social security income alone, plus your modest pension, IRA or other retirement income, won’t be enough?
If you or someone you know is in one of these situations, a homeowner reverse mortgage might be ideal.
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WHAT IS A REVERSE MORTGAGE? A reverse mortgage pays tax-free income to the senior citizen homeowner. It is the exact opposite of a traditional “forward” mortgage where the homeowner borrows money and then repays that borrowed money, plus interest, to the lender.
To qualify for a reverse mortgage, the homeowner must be at least 62. In the case of husband and wife, both co-owners must be at least 62. If one co-owner spouse is not yet 62, he or she can sign a quit claim deed to the other over-62 spouse who then becomes eligible for a reverse mortgage.
Most senior citizen homeowners have never heard of reverse mortgages or don’t fully understand them. But they are becoming more popular as word spreads.
According to Peter Bell, President of the National Reverse Mortgage Lenders Association in Washington, D.C., reverse mortgage originations increased by 76 percent in 2003 compared to 2002.
There are no restrictions on how reverse mortgage income can spent by the homeowner. The senior citizen homeowner’s credit and income are irrelevant. However, the senior homeowner cannot have any unpaid federal obligations and must not be involved in a bankruptcy.
NO PERSONAL LIABILITY FOR REPAYMENT. Perhaps the best feature of a reverse mortgage is the homeowner is not personally responsible for repayment. Only the residence is security for the reverse mortgage.
When the homeowner dies, sells or fails to occupy the home for more than 12 months, then the reverse mortgage “matures” and must be paid, including accrued interest.
But no matter how long the homeowner lives in the residence, even to age 120, the homeowner can never be forced out no matter how low the equity becomes.
Contrary to widespread misbelief, the reverse mortgage lender does not own title to the residence. However, the lender does have a first mortgage security interest in the property, the same as with a traditional mortgage.
REVERSE MORTGAGES REWARD ADVANCED AGE. A strange feature of reverse mortgages is the older the homeowner, the better for the homeowner. The reason is an older homeowner has a shorter life expectancy than a “young whippersnapper” who is at the minimum age of 62. The result is an older homeowner can receive larger cash payments than can younger homeowners.
Reverse mortgage lenders especially like homeowners in their seventies, eighties and even nineties. The reason is the term of the loan is likely to be much shorter, and therefore more profitable due to early “maturity” than for a reverse mortgage made to a young 65-year-old whose life expectancy is about 15 years.
The drawback for lenders of homeowners in their 60s obtaining a reverse mortgage is their life expectancy is considerable. For example, a 65-year-old, $250,000 homeowner can receive about $800 per month lifetime income from an FHA reverse mortgage. But a 75-year-old owner of the same house can receive about $1,000 monthly lifetime income.
A very general guideline is a 65-year-old homeowner can borrow up to 26 percent of his/her home’s market value; a 75-year-old can receive up to 29 percent, but an 85-year old can borrow up to 56 percent of the home’s market value. The reason these percentages seem low is they consider the homeowner’s age and accrued reverse mortgage interest over their expected future occupancy.
NOT ALL HOMES ARE ELIGIBLE FOR REVERSE MORTGAGES. Owner-occupied single-family houses, one-to-four-unit apartment buildings, condominiums and manufactured homes located on separate lots are usually eligible. But ineligible properties include vacation, second and rental homes, co-op apartments, houseboats, mobile homes, commercial properties, and farms (unless the residence is on a separate lot).
Because reverse mortgages are recorded as a first mortgage, any existing mortgages or liens must be paid off. However, this can be accomplished with proceeds from the reverse mortgage if the existing encumbrances are not substantial.
THREE MAJOR REVERSE MORTGAGE LENDERS. There are three major reverse mortgage lenders, each offering different types of reverse mortgages. FHA(HECM) and Fannie Mae reverse mortgages are available in all 50 states.
FHA offers home equity conversion mortgages (HECM). More than 90 percent of reverse mortgages are HECMs. Their adjustable interest rate is tied to the one-year U.S. Treasury bill index, plus a margin. But the major drawback is the low limits, which range between $160,176 in low-cost counties up to $290,319 in high-cost areas, with higher limits for Alaska, Guam, Hawaii and the U.S. Virgin Islands.
Fannie Mae’s “Home Keeper” reverse mortgages are similar but tied to the one-month secondary market CD adjustable index. However, the higher $333,700 loan limit is more attractive to homeowners of more expensive homes.
Financial Freedom Plan reverse mortgages have no maximum limits. Generally, they appeal to homeowners with residences worth $500,000 or more. But these loans are not available in all states.
REVERSE MORTGAGE PAYMENT CHOICES. Reverse mortgages offer four basic payment choices: (1) credit line to be used whenever the homeowner wishes (such as to buy a car, install a new roof, or take a cruise); (2) lifetime tenure monthly income; (3) term monthly income (such as for 10 years); (4) upfront lump sum for the reverse mortgage maximum; or (5) any combination of the above. The credit line is the most popular choice, but it is not available in Texas.
HOW TO COMPARE REVERSE MORTGAGES. The easiest way to compare reverse mortgages from the three major lenders is to use an Internet calculator. The best calculator is found at www.financialfreedom.com.
Federal law requires reverse mortgage lenders to provide borrowers with a Total Annual Loan Cost (TALC) calculation. TALC shows the annual interest rate for (1) the first two years as a percentage (very high), (2) at the borrower’s life expectancy age (much lower), and (3) at 40 percent beyond the borrower’s life expectancy (very reasonable).
Because reverse mortgage lenders charge their origination fees up-front, and the longer the senior citizen lives in their home, as a general rule a reverse mortgage should not be obtained unless the homeowner expects to remain in their residence at least five years.
WHERE TO FIND DETAILS ON REVERSE MORTGAGES. Most traditional mortgage lenders, such as local banks and mortgage brokers, do not offer reverse mortgages. The largest reverse mortgage originators are Financial Freedom Plan, Wells Fargo Mortgage, Seattle Mortgage and GMAC. Dozens of smaller regional lenders also specialize in reverse mortgages.
The best place to easily locate a reverse mortgage lender in your area is to go on the Internet to www.reversemortgage.org. Then click on your state for a list of lenders and the types of reverse mortgages they offer. By calling their toll-free 800 numbers listed on the Web site, you will quickly be in touch with a local reverse mortgage representative.
DISADVANTAGES OF REVERSE MORTGAGES. Many senior citizen homeowners are hesitant to obtain a reverse mortgage because they realize they will be spending their home equity on themselves to enjoy their retirement years. This is a major obstacle to homeowners who feel they have an obligation to leave a big inheritance to their children or grandchildren.
A possible disadvantage occurs for individuals receiving SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California). These benefits can be reduced if the senior citizen homeowner does not spend their entire reverse mortgage income in the month of receipt. However, Social Security and Medicare payments are not affected by non-taxable reverse mortgage income.
More details are in my brand-new special report, “Secrets of Tax-Free Reverse Mortgage Income for Senior Citizen Homeowners,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
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