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Seniors moving forward in reverse
Originally published December 19, 2008

By: Adam Avery: Homes, Mortgages & More

Post-World War II baby boomers (those born between 1946 and 1955) and those of the Generation Jones era (born between 1956 and 1964) will ignite a trend in home borrowing for the next 30 years: The reverse mortgage.

The first reverse mortgage originated in 1989, shortly after President Reagan signed Senate Bill 825 (Federal Housing Administration's Reverse Mortgage Legislation). Since then, nearly 500,000 reverse mortgages have been originated, and that's just merely the tip of the iceberg considering 76 million American children were born between 1946 and 1964, of which some 70 percent own a primary residence.

Although only primary residences qualify for a reverse mortgage, one in every four boomers own additional real estate (i.e. land, investment property, commercial property, second homes, vacation homes). Nearly 70 percent believe that paying off a mortgage quickly is prudent; facts that bolster the position of one of the two reverse mortgage qualifying factors, accessible equity.

Despite boomers' appetites for homeownership, polls indicate that the majority feel financially unprepared for retirement.

Many will soon realize that the promises made by the Social Security Act portion of Roosevelt’s New Deal is a raw deal when it comes to providing sufficient retirement income. Recent losses in investment portfolios coupled with increased life expectancy and rising health care costs will further fuel the necessity for an additional source of income.

To the rescue come the FHA’s Home Equity Conversion Mortgage (HECM), Fannie Mae’s Homekeeper (created in 1996) and, to a lesser extent, the proprietary reverse mortgage.

A reverse mortgage differs from a traditional forward mortgage based on, most notably, by what is required to qualify. Forward mortgages require credit worthiness, the capacity to repay the loan on a monthly basis, and sufficient equity in the collateralized asset (the home being purchased or refinanced).

Reverse mortgage qualification requires only that all applicants listed on the title of the property be at least 62 years old (some products require age 60) and that there is enough equity in the property.

Reverse mortgages could care less whether or not the applicant is current on their existing mortgage, has had a bankruptcy in the past, is currently in foreclosure, or if the applicant has more expenses than they do income.

The amount of money that an applicant qualifies for under a reverse mortgage depends solely on the applicant’s age, the appraised value of the home and current interest rates.

Generally speaking, those who are older and have more equity in their homes will be eligible for more funds than those who are younger and have less equity. Payments made to the homeowner of a reverse mortgage can be made (taken as) a lump sum of cash, an accessible line of credit, monthly payments until death, monthly payments for a specified period of time, or a combination of all.

Unlike a forward mortgage where the principal balance of the loan goes down a little each month, the reverse mortgage balance goes up each month, but does not have to be repaid until the homeowner dies or moves out of the house.

The most beneficial aspect of the reverse mortgage is that at the time the loan is due to be repaid, if the balance owed is greater than the market value, the estate does not have to make up the difference.  Heirs are protected from owing any deficiency. If the home has lost value, the lender suffers the loss. If the value of the home exceeds what is owed, the estate is entitled to the difference. The lender does not benefit in any excess equity.

Typically, a reverse mortgage will payoff the existing forward mortgage AND allow for additional funds to be utilized by the homeowner. 

The most common question from prospective reverse mortgage applicants is “does the bank own my home?” No.

In fact, the homeowner remains responsible for paying homeowner’s insurance, real estate property taxes, and maintenance of the property.

On the surface, reverse mortgages “sound too good to be true.” They are a fabulous solution for many, but there are cons to every pro.

Although little out-of-pocket cost is incurred, the fees associated with a reverse mortgage are akin to purchasing a home.

Expect two percent of the first $200,000 to go to the lender as an origination fee as well as one percent for any portion above $200,000. The FHA insurance will cost two percent as well. Expect an additional percent for title and escrow costs including title insurance and recordation fees.

On the other hand, income received from a reverse mortgage is free from income tax and does not affect your Medicare of Social Security benefits.

Depending on the state you reside in, it may affect your Medicaid benefits.

Please consult with a professional before proceeding.

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