At a very late point in your life

Reverse mortgages are high-cost loans that literally “reverse” (hence the term) the mortgage payments you’ve made in the past – but with a higher interest rate.  In other words, you are undoing your life’s work.  The definition of a reverse mortgage is one in which a homeowner, usually an elderly or retired person, borrows money in the form of annual payments which are charged against the equity of the home.

If bankruptcy is closer than the horizon, it could be a life raft.  If not, it could be giant mistake.  And with an unsure economy, it’s easy to frighten people into hasty or premature decisions – and predatory lenders cater to just that fear.  Unless a senior citizen is already facing looming foreclosure and/or bankruptcy, the risks that come with reverse mortgages are far greater than the advantages.

There is a great peril for serious financial consequences in the future. Later there may no equity left. You are at a very late point in your life to find you have insufficient funds to live.‘Better look before you leap.  While a reverse mortgage deal could put money in your hands, the transaction is likely to be quite confusing… [and] could also put a lot of your money in someone else’ pocket.”

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Two sources of tax-free income

A reverse mortgage on a second home could be an appealing alternative for an individual or couple wanting to keep a family vacation home a few more years. Often, the parents would like to leave a cabin or getaway to their children, yet they need the equity from the cabin for their retirement years. Using a reverse mortgage to extinguish an underlying mortgage on the cabin could be the needed option of keeping the cabin in the family. When the parents die or transfer title to their children later in their lives, the kids could sell the property and pay off the reverse mortgage with the proceeds or refinance the property and continue the second-home use. When a child reaches the age of 62, the child would become eligible to take out another reverse mortgage on the vacation home. Reverse mortgages do not require a credit report or income qualification required With the recent reverse mortgage programs for second homes, it’s now possible for a homeowner to have two reverse mortgages at the same time — one on the primary home and one on the second home — thereby having two sources of tax-free income. If the second home, or primary residence, plummets in value, owners would see their equity evaporate even faster by using a reverse mortgage. That’s because the amount spent, plus interest, would further reduce any loss in market value. While reverse mortgage costs and distributions can be washed in appreciating markets, they can quickly erode the bottom line in a down market.   

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Financial consequences in the future

The good news it’s a very easy way of coming into a large amount of cash at a moment when it might be needed.The biggest mistake that borrowers make when getting the reverse mortgage loan is that they fail to really think it through and to make sure that they know what it’s all about. You need to make sure that you understand the loan inside and out because there are drawbacks to this sort of financing. It  places in great peril for serious financial consequences in the future. Later there may no equity left. You are at a very late point in your life to find you have insufficient funds to live.For those short of retirement cash, reverse mortgages can be an attractive option — especially if there’s no concern about leaving money for heirs. “If your plan is to leave the world with zero assets, not even a home, no kind of legacy at all, that is certainly a way to achieve that.”Reverse mortgages should generally be a last resort and offers tips to anyone considering these types of loans.  

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Pay taxes after equity is exhausted

When a reverse mortgage is procured, the homeowner could live in the house for the remainder of his or her life, even after equity is exhausted. For some seniors, the big threat of homelessness is forgetting to pay them — or worse, not having enough income to pay them. The taxes, maintenance, insurance and other expenses are the responsibility of the homeowner. If one goes into default on these items, the mortgage can be “called.” The person entering into the reverse mortgage must be made aware of the fact that he or she has these responsibilities. If possible, a responsible family member should make sure that the taxes and insurance are paid in a timely fashion.

Your heirs may sell the home in order to pay the balance off if you pass away. But they could decide to keep the house if they can come up with the cash to pay off the loan. If the house is worth less than the amount due, you or your heirs will owe to the lender only what the house can sell for. If it is worth more than the amount due, you or your heirs get to keep the difference.   

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Foreclosure and Reverse Mortgage.

Many seniors are near or enter foreclosure on their homes.If you are behind in your payments, even if the lender has filed a notice of default, you may still get a new reverse mortgage loan – and once you get it, you will never make another payment for life. If you are in default on an SBA loan, an FHA insured mortgage or other federal obligation, you would not be eligible for a reverse mortgage. Therefore, if the current mortgage that is delinquent is an FHA loan but has not had a notice of default filed yet, you can still get a reverse mortgage. Once the notice of default has been filed, the borrower would need to be able to bring in funds to cure the default before the reverse mortgage could proceed. Those funds could come from a family member, etc. Once the reverse mortgage was completed and funded, the borrower would never have to make another mortgage payment for life. Your property has to be in reasonably well maintained condition with no major repairs needed (some repairs can have funds set-aside to be completed). You need to realize that if you are going to use a reverse mortgage to stop a foreclosure it’s a long term solution that must be dealt with in a timely manner without a lot of extra time for delay.

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Reverse Mortgage – now is a good time for…

Aside from the borrower’s age and the property location, the other factors that determine how much money borrowers can receive on their reverse mortgage are the property’s value and the interest rates. Property values have been declining for a while now and are projected to continue to go down at least through the end of 2008. Now is the perfect opportunity to make the most of the property’s value before they fall to a lower level and the borrower does not qualify for as much money. And then there is the interest rate part of the equation. The fully indexed rate for a HUD HECM is below 5% which means that the borrower will receive the maximum amount of cash available under the program.Borrowers and family members should take a good look at their options, consider the circumstances and make sure you have the safeguards in place. Don’t let uninformed or biased reporters or authors push you one way or the other, take a good look and see if it’s right for you and if it is, now is a great time to be a reverse mortgage borrower!Do not to obtain your reverse mortgage from anyone selling other products.

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The fixed or adjustable rate?

Now we come to the equity savings of the adjustable rates. The fixed rate reverse mortgage requires that you make a full draw at closing. This means that you begin accruing interest on the full amount of the loan from the very first day. Because of the other options the adjustable rate mortgages allow which include the line of credit, the monthly payments and a combination of monthly payments and line of credit, where the borrower receives the funds as they need them, interest is not accrued until you actually receive the money. This way, you are only taking money as you need it so you are not eating into your equity as fast as you would if you took all the money out in the beginning.So if you consider a 17 year average that beats today’s rates through all kinds of markets (not just in today’s low rate environment), qualifies most borrowers for more money and a program that keeps your equity in your property longer, it turns out that the Adjustable Rate Reverse Mortgages are still a great deal! seniors may purchase home with reverse mortgage

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Receiving funds from Reverse Mortgage…

When you’re receiving funds from Reverse Mortgage you can choose one or more payment options:

You can receive one payment which equals the value of your home, getting your money in a lump sum.

You can receive payments over a specific course of time, 10 years for example.

You can receive a specific amount paid to the homeowner every month until they die or permanently move out of their home. Monthly payments give the homeowner a sense of security in knowing that their money will not run out before they die.

 Funds can be provided as a line of credit and be paid back to the lender. A specific amount could be taken out to make repairs or to pay a bill as the funds are needed.

Getting the right type of terms for your needs is totally up to you. Give thought to what your needs are, how much funding is required and how soon you will need the funds. The funds are yours and you can do whatever you want to with it with no restrictions.

Reverse mortgage fees are quite high (up to 5 percent of the loan’s value).You’re responsible for any home-owner’s fees, property taxes, insurance and repairs. Failure to meet those obligations could ultimately result in loan cancellation or even foreclosure.
The longer you carry a reverse mortgage, the more it will decrease your home equity, so the inheritance you leave behind will be smaller.  

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Adult children as a lender.

 Many of us want to make sure that our children will inherit the house that we struggled so hard to buy and maintain over the years. We do not want some lender to take our hard-earned equity.Parents should consider a reverse mortgage — either from a commercial lender or privately from their adult children. That is where you, the adult children, come in. Instead of having your parents go to a commercial lender, can you afford to be the private lender?  They can enter into a line of credit arrangement with you. They would sign a promissory note that is secured by a deed of trust (a mortgage) on the property.The terms can be similar to those a commercial lender requires, but because this is family, the closing costs can be nominal. The deed of trust must, however, be recorded among the land records where the property is located. And the interest rate must be consistent with what a commercial lender would charge, or there could be tax complicationFrom your parents’ point of view, they keep everything in the family. They are, in effect, borrowing money from their children instead of a stranger. When the loan is finally paid off — either because your parents sell the house or die — they or their estate can deduct all the interest payments.And during their lifetime, your parents do not have to pay you anything. The interest just continues to accrue. Your parents can also use this money to buy additional life insurance, which will help with any taxes that the estate may be obligated to pay.You get significant benefits also, although when you finally get paid, you will have to declare the interest as taxable, ordinary income. The loan on the property will reduce any estate taxes that must be paid when your parents die. And because you will inherit the house, you get the stepped-up basis for tax purposes.

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Finance Minister has proposed…

The Finance Minister has proposed to amend the Income Tax Act to provide that reverse mortgage would not amount to ‘transfer’, and the income received by senior citizens would not be taxed as ‘income’ in their hands.

This step has been welcomed by housing finance companies. The government has made it clear that a loan under a reverse mortgage scheme would not be considered as transfer of capital, thus putting it beyond the purview of income tax.

The scheme was notified by the housing finance sector regulator, National Housing Bank, last year to ensure financial security to senior citizens. Subsequently, many banks and housing finance companies had launched such a scheme. However, the demand for this scheme was low due to lack of clarity on the tax treatment.

The amendments proposed in the budget are a welcome move. The scheme will not be regarded as a transfer of a capital asset. As such, this will not attract capital gains tax. Also, the loan amount will be exempt from income tax for the borrower.

The arrangement will be available to those above a specific age. The aim is to make a house generate returns while it is used by the owner. The amount paid out each month is for a specific period of time.

The financing institution has to bear the risk of the individual outliving the agreement. At the expiry of the agreement period, the monthly payments to the owner stop. The monthly payout depends on the value of the property, the term of the agreement and the rate of payment. The valuation of the property is to be done by professionals. The entire payout mechanism – calculation and computation – depends on the law of probability.

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