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A reverse mortgage, also referred to as a home equity conversion loan, is a financial instrument that allows seniors to access the equity in their home without income or credit qualifications. Seniors must be a minimum age (country-specific), live in their own home, and have equity in it. The important distinction between a reverse mortgage and a conventional mortgage is that there are no principal or interest payments required on the home while the borrower occupies the property. In the case of two borrowers being on title, should one permanently leave the property due to a death or hospitalization, the other borrower continues to remain in the home. Repayment is only required if the borrower sells the home, or moves out of the property for more than 365 consecutive days.
In a conventional mortgage, the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full, the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Additionally, with the line of credit option comes a feature known as the credit line growth rate, a particularly attractive feature not found in a traditional home equity line of credit. Funds left or returned to the line of credit are subject to the credit line growth rate which allows borrowers to gain on the unused funds. So, for example, if the borrower has been approved for $100,000 and uses $25,000 of that amount, they will accrue growth on the $75,000 balance. Assuming the interest rate is 6%, the credit line will grow to $79,500 – a gain of $4,500.
As with any mortgage, title to the property remains in the name of the homeowners, to be disposed of as they wish. As with a conventional mortgage, the title is encumbered by the security interest the bank has in the reverse mortgage. If a borrower does not make full monthly payments to cover the interest, that interest is capitalized (added to the principal). In the event that the interest accrues to a point that the amount owed is more than the home's value the borrower may stay in the home and FHA will cover any loss to the lender or borrower.
A reverse mortgage may be refinanced if enough equity is present in the home and interest rates have reduced, or more proceeds will be available to the borrower.
A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
A reverse mortgage lien is recorded twice. The first time it is recorded by the lender. It is recorded a second time by HUD. In the event that the lender should become unable to continue in its obligation to make disbursements to the borrower HUD will be able to immediately step in and ensure that the homeowner will continue to receive their reverse mortgage disbursements. It has been noted by some attorneys that while a reverse mortgage is not an asset protection vehicle it may operate similarly in the event of a personal injury lawsuit involving the borrower's home. An attorney representing the plaintiff will first check to see the recorded home value so as to know if the homeowner has funds with which to settle such a claim. They will check to see the lien obligations on the home. The records will show a total debt of about twice the value of what the homeowner borrowed.
Reverse mortgages are available in Australia. However, there is little regulation: the Financial Services Reform Act does not regulate the loans, and although potential borrowers should seek financial advice before applying for a reverse mortgage, there is no legislation that requires the advisor to be licensed.
Eligibility requirements vary by lender. To qualify for a reverse mortgage in Australia,
Reverse mortgages in Australia can be as high as 50% of the property's value. The exact amount of money available (loan size) is determined by several factors:
The cost of getting a reverse mortgage depends on the particular reverse mortgage program the borrower acquires. These costs are frequently rolled into the loan itself and therefore compound with the principal. Typical costs for the reverse mortgage include:
In addition, there are costs during the life of the reverse mortgage. A monthly service charge may be applied to the balance of the loan (for example, $12 per month), which then compounds with the principal.
The money from a reverse mortgage can be distributed in several different ways:
Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements. However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed under the Income Test; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.
The reverse mortgage comes due – the loan plus interest must be repaid – when the borrower dies, sells the property, moves out of the house, or breaches the contract in some way.
Prepayment of the loan – when the borrower pays the loan back before it reaches term – may incur penalties, depending on the program. An additional fee could also be imposed in the event of a redraw.
"Some providers offer a 'no negative equity guarantee'. This means that if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against the estate or other beneficiaries of the borrower."
Eligibility requirements vary some by lender. To qualify for a reverse mortgage in Canada,
The interest rate on the reverse mortgage varies by program. The length of loan also varies, with some programs offering no fixed term and some offering fixed terms ranging from 6 months to 5 years.
The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. Depending on the program, there may be the following types of costs:
The money from a reverse mortgage can be distributed in several different ways:
Once the reverse mortgage is established, there are no restrictions on how the funds are used. "The money from the reverse mortgage can be used for any purpose: to repair a home, to pay for in-home care, to deal with an emergency, or simply to cover day-to-day expenses."
Money received in a reverse mortgage is an advance and is not taxable income. It therefore does not affect government benefits from Old Age Security (OAS) or Guaranteed Income Supplement (GIS). In addition, if reverse mortgage advances are used to purchase non-registered investments – such as Guaranteed Investment Certificates (GICs) and mutual funds – then interest charges for the reverse mortgage may be deductible from investment income earned.
The reverse mortgage comes due – the loan plus interest must be repaid – when the borrower dies, sells the property, or moves out of the house. Depending on the program, the reverse mortgage may be transferable to a different property if the owner moves. Prepayment of the loan – when the borrower pays the loan back before it reaches term – may incur penalties, depending on the program. In addition, if interest rates have dropped since the reverse mortgage was signed, the mortgage terms may include an "'interest-rate differential' penalty."
If the borrower lived long enough that the principal and interest together exceed the fair market value when the mortgage is due, the borrower or heirs do not have to pay more than the house's value at the time.
In 1986 William Turner, a Vancouver, BC based chartered accountant founded the Canadian Home Income Plan (CHIP) Corporation. CHIP became Canada's first and only national provider of reverse mortgages after William Turner had spent 2 years studying the benefits and success of reverse mortgages in the UK and US.
In 1986, reverse mortgages had been used since the 1930s in the UK, and the 1960s in the US. The long-term success of the reverse mortgage was due to the demand for a flexible and secure financing solution geared toward seniors. Applying this concept led to year over year growth and popularity of reverse mortgages.
The Canadian reverse mortgage was originally developed to help cash strapped seniors, but was used primarily by well-off seniors. These well-off seniors viewed the reverse mortgage as a way to gradually sell off their home without having to move. The most common use of the reverse mortgage is to pay for their children to purchase their first home or help grandchildren's educations.
CHIP gained creditability throughout the early 1990s as a secure, safe, and affordable way for seniors to finance their retirement. In 1997, CHIP finally landed its first major referral partner: Canadian bank TD. CHIP and TD even had their own co-branded 1-800 number, which was 1-800-TD-9-CHIP. By 1999, 2 more major banks – Royal Bank, and Hong Kong Bank – offered CHIP as part of their retirement products.
In 2001, reverse mortgages from CHIP became nationally supported and distributed in every province across Canada. Throughout the early 2000s the reverse mortgage market in Canada grew in leaps and bounds, which led to interest from other international reverse mortgage lender.
In 2007, Seniors Money International (SMI) launched in Toronto, Ontario with big ambitions to compete with CHIP in many ways. Unfortunately, the timing of the launch of SMI was all wrong, and they were soon met by one of the most challenging credit markets of the last century. As a result of the credit crunch and inability to find an ongoing source of funding, SMI had to stop accepting new business.
Through the credit crunch CHIP kept going and in 2009 CHIP was granted letters of patent and began operating as a Schedule 1 Bank under the new name, HomeEquity Bank. Since then, CHIP lowered the age requirement to 55 in 2011, and reduced their interest rates. Currently their interest rates are comparable to most banks' posted rates.
Since reverse mortgages entered into the Canadian marketplace in 1986, they have helped thousands of Canadian seniors unlock the equity in their home. As a result, the reverse mortgage product has gone from a niche product to a mainstream financial solution.
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age and must occupy the property as his or her principal residence. In addition, any mortgage on the property must be low enough that it will be paid off with the reverse mortgage proceeds. There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payment. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most 1–4 family dwellings, FHA approved condominiums and PUD's will qualify. Manufactured housing qualifies based on standard FHA guidelines.
Before starting the loan process for an FHA/HUD reverse mortgage, applicants must take an approved counseling course. This counseling is available at no or low cost. The counseling is meant to serve as a safeguard for the borrowers, to ensure they completely understand the reverse mortgage. The counselor will explain the legal and financial obligations of a reverse mortgage. The borrower will receive a certificate of completion that is required before the loan application can be processed.
The maximum lending limit varies by county, but may not exceed $625,500.00. Reverse mortgages for homes valued over the maximum limit are called "jumbo" reverse mortgages, and are generally offered as proprietary reverse mortgages. For owners of higher-valued homes, a jumbo loan can provide a larger loan amount; however, these loans are currently uninsured by the FHA and their fees are often higher.
The amount of money available (the loan size) is determined by the borrower's age, the lesser of the value of the home or county lending limit, and the interest rate of the program the senior selects. The primary factors are:
All these factors contribute to the Total Annual Lending Cost (TALC) – the single rate, including all the loan costs – as defined by the US Federal Government in Regulation Z. The specific formulas to calculate the impact of the factors listed above can be found in Appendix 22 of the HUD Handbook 4235.1.
The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there will be the following types of costs:
In all of these cases, except the real estate appraisal, the costs of a reverse mortgage can be financed with the proceeds of the loan itself.
In addition, there are costs during the life of the reverse mortgage. A monthly service charge (between $25 and $35) is usually added monthly to the balance of the loan. An annual Mortgage Insurance Premium is levied every year, equal to 1.25% of the mortgage balance – note that this is in addition to the MIP paid at settlement.
Interest rates on reverse mortgages are determined on a program-by-program basis. Because the loans are secured by the home itself, and backed by HUD, the interest rate should always be below any other available interest rate in the standard mortgage marketplace for an FHA reverse mortgage. Prior to 2007, all major reverse mortgage programs had adjustable interest rates. Such adjustable rate reverse mortgages are still being offered, in programs that are adjusted on a monthly, semi-annual, or annual rate up to a maximum rate. Several lenders now offer FHA HECM reverse mortgages that have fixed interest rates. Some fixed rate reverse mortgages limit the cash proceeds to half of that offered by adjustable rate reverse mortgages. The borrower(s) will be required to take out the entire amount offered at closing. A mortgagee who has selected a variable rate HECM can change the loan's payment plan at any time for a $20 fee.
Some state and local governments offer low-cost reverse mortgages to seniors. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes, but most of them often have more favorable interest rates and fewer or no fees associated with them. These programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.
The most common reverse mortgage is one in which the owner receives cash or a credit line from an existing home. The money from a reverse mortgage can be distributed in several different ways:
Once the reverse mortgage is established, there are no restrictions on how the funds are used. The borrower can move money into investments or spend it as they wish. If a borrower wishes interest-bearing instruments, the money can be kept with the lender (in which case the account grows by the same percentage as the interest rate of the loan), the funds can be moved to a directed account with a financial specialist (an option that is risky unless the borrower directs the specialist's investment options), or the money can be invested and managed by the borrower.
The Housing and Economic Recovery Act of 2008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds — the so-called HECM for Purchase program, effective January 2009. The "HECM for Purchase" applies if "the borrower is able to pay the difference between the HECM and the sales price and closing costs for the property. The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs (i.e., handrails, one-level properties, ramps, wider doorways, etc.). Texas was the last state to allow for reverse mortgages for purchase.
It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. Unlike common practice in a standard mortgage, funds for taxes and insurance are not typically paid out of an escrow fund; they are paid directly by the homeowner. A lapse in either taxes or insurance could result in a default on the reverse mortgage. Borrowers are given the option of creating a separate account specifically for paying future taxes and insurance costs; known as a Lifetime Expectancy SetAside. Additionally, borrowers can authorize their lender to withhold a portion of their line of credit for such payments.
The American Bar Association guide advises that generally,
The money received from a reverse mortgage is considered a loan advance. It therefore is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received; the borrower could then lose eligibility for such public programs if total liquid assets (cash, generally) is then greater than those programs allow.
The loan comes due when the borrower dies, sells the house, fails to keep the taxes or insurance current, or moves out of the house for more than 12 consecutive months. Once the mortgage comes due, the borrower or heirs of the estate have an option to refinance the home and keep it, sell the home and cash out any remaining equity, or turn the home over to the lender. Once a reverse mortgage is called due and payable, the borrower (or their heirs) can possibly be granted time extensions by the lender to give them up to one year to make this decision.
If the property is turned over to the lender, the borrower or the heirs have no more claim to the property or equity in the property.
The lender has recourse against the property, but not against the borrower personally and not against the borrower's heirs. Thus the mortgage is within the category known as "non-recourse limit".
Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As of May 2010, there were 493,815 active HECM loans. As of 2006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000. However, through the annual appropriations acts, Congress has temporarily extended HUD's authority to insure HECM's notwithstanding the statutory limits.
Program growth in recent years has been very rapid. In fiscal year 2001, 7,781 HECM loans were originated. By the fiscal year ending in September 2008, the annual volume of HECM loans topped 112,000 representing a 1,300% increase in six years. For the fiscal year ending September 2011, loan volume had contracted in the wake of the financial crisis, but remained at over 73,000 loans that were originated and insured through the HECM program.
Loan volume is expected to grow further as the U.S. population ages. The U.S. senior population is expected to increase from 35 million in 2000 to 64 million in 2025, and seniors are expected to make up a larger share of the population.
HECM Plus 60 – Allows the borrower to take out the most equity in the home, but comes with a Upfront Mortgage Insurance, by the FHA, at a cost of 2.5%. As of April 1, 2013, HUD eliminated the HECM Standard fixed rate product, currently the HECM Standard only comes as a variable rate loan. HECM Minus 60 – FHA allows the Upfront Mortgage Insurance cost to be just .50%, but the borrower has access to less equity in the home.
A drawback to reverse mortgages is the high upfront costs. Upfront cost, however, is tempered by the lower interest rate as time goes by, but some seniors choose other options to draw on their home equity, particularly if they don't plan to remain at the property more than five years.
Other options which can free up home equity but avoid the high upfront costs of a reverse mortgage include: 1) intra-family loan or sale-leaseback and, 2) selling and moving to a less expensive dwelling or location. However, when selling, the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Also, there is the issue of capital gains taxes (though the first $250,000 of gain is usually exempt from taxation for a single person who has lived in the house for at least two years). Currently, there is a coordinated government program called "Aging in Place" intended to assist homeowners wishing to remain in their homes and/or neighborhoods. Studies conducted by various agencies and organizations, including AARP, show that over 80% of elderly homeowners do not want to move.
No-cost and low-cost mortgages are available for those homeowners who anticipate moving from the home in the near future. For example, they may select a home equity line of credit, commonly called a "HELOC", requiring interest-only payments for 10 years. These loans typically have very low (or zero) upfront costs, but the interest rates are usually slightly higher than those of a reverse mortgage. Since monthly payments are required on a HELOC, borrowers need to qualify based on their incomes and credit scores. Often, seniors who may be on a limited fixed income can't get approved for a HELOC for this reason. Reverse mortgages do not require monthly payments and, as a result, income and credit score are not considered as part of the approval process.
'''Reverse Mortgage in India-- The Concept of Reverse Mortgage came in India in 2009. Under this concept, a senior citizen of 60 years of age or more can derive the value of his house. He along with his spouse can continue to live in the house through their lifetime. Those in need of money can mortgage their property with a lender [scheduled banks or housing finance companies] and receive regular payments from them in the form of either installments or in a lump sum. The loan is not to be serviced as long as they are alive and occupy the property. The annuity income from a reverse mortgage is tax-free. Annuity payments continue as long as the owners live while remaining the owner and occupying the house. Source - The Times Of India Newspaper - New Delhi Edition - Dated 11.01.2014 - Legal Article - "Reverse Mortgage Gets Attractive for Senior Citizens.
Reverse mortgages have been criticized for several major shortcomings: