Reverse Mortgage Basics Review
Reverse Mortgage Basics Review
UPDATE: 05/2016 There is a general consensus among analysts that Reverse mortgages are safer than ever. This is attributed to tougher lending standards than those that once prevailed combined with new limits and stricter federal requirements.
UPDATE 10/02/2013: Surviving Spouse protected. A surviving spouse not listed as a borrower on a reverse mortgage can no longer be foreclosed upon. The US District Court for the District of Columbia has ruled that HUD’s rules contradict federal law. A substantial number of people are affected by this decision that allows surviving spouses to remain in their home as long as they want.
Reverse mortgage basics must begin with my admitting that I have always felt a certain amount of personal distaste for Reverse Mortgages. This distaste is based on a nagging intuition that many who elect to go this route are vulnerable and poorly informed. Their delinquency rate of 9.5% is far higher than it is for conventional mortgages. It’s only fair that we take a look at just what reverse mortgage basics consists of. Every person’s situation is different in some respects from the next person. Like any other option a reverse mortgage is at least worth knowing about.
More than One Kind of Reverse Mortgage
A Reverse Mortgage is basically a loan that converts a portion of a home’s equity into cash. Property owners are still responsible for taxes and insurance. That cash can be paid out as a lump sum, as fixed monthly credits for the life of the loan, as a line of credit or as some combination of the above. Because interest rates are so low payouts are at an all time high. Applicants must be 62 or older. Medicare or Social Security benefits are not affected. Those who are on SSI or Medicaid should beware. If all the funds are not used immediately, the remaining money could be considered an asset affecting eligibility.
Home Equity Conversion Mortgage (HECM)
In 2008 Congress authorized Home Equity Conversion Mortgages. Seniors can buy a home and take out a reverse mortgage at the same time. In order to do this the borrower must have the means to pay the difference between the sale price of the property and the maximum they can draw on the HECM.
Reverse Mortgage basics Bring High Upfront Fees
Reverse mortgages are very profitable for banks. Banks charge high upfront fees. Interest is compounded over the life of the loan. Interest can be either fixed or variable.
Refinancing a Better Option
The homeowner invariably is better off to simply refinance the home with a 30 year fixed mortgage if that option is available. Mortqage insurance will not be required because we are dealing with a high amount of equity. Unfortunately this may not be realistic because of the limited income available to many retired people. Rising interest rates have taken a toll on refinancing activity. Inability to qualify for refinancing is what leaves many older homeowners with the Reverse Mortgage as their only option. Credit scores are not a factor in Reverse Mortgages but are likely to be given some consideration as the rules are rewritten. Many elderly people do not actively use credit so their scores are likely to be low. Making the rules too restrictive will take the option away from the people who need it most. Proposed rules would limit the amount of the reverse mortgage to 60 percent of the maximum amount available after the payoff of the current mortgage. Reverse mortgages require the payoff of the previous mortgage.
Mandatory Counseling part of reverse mortgage basics
Counseling by a HUD approved and financed counselor is mandatory before a Reverse Mortgage application can even be applied for. Lenders like to urge taking the younger buyer off title to lessen their risk and bring a higher payout. This can leave the survivor in a bad situation. The counselor will help the applicant analyze other options that may be available. It’s always valuable to listen to a trained person who has an outlook free of emotion and even desperation in many cases. If a Reverse Mortgage is the best choice for the home owner they can then be confident that they have made an informed choice with instructions on reverse mortgage basics.
Fha moves to limit size, require escrow accounts for taxes and insurance
The FHA has suffered huge losses from Reverse Mortgage defaults caused by falling home values. The losses for this year alone already total more than 5 Billion dollars. In an effort to stabilize its position on new ones it wants to require financial institutions to conduct financial assessments and require escrow accounts for taxes and insurance on new accounts.