Reverse Mortgage

 

A reverse mortgage is used to refer to a loan available to senior citizens which is used to release home equity in the property as one lump sum, a stream of multiple payments, an increasing line of credit or a combination of all three. The term is widely used USA and is known as lifetime mortgage in the UK. The homeowner’s obligation to repay the loan is deferred until the owner of the property passes away or is house is sold to another buyer. As in a typical mortgage, the amortization period lasts about 30 years when the property is released from the lender; in case of reverse mortgage, the homeowner makes no payments and all interest is added to the lien on the property.

Home equity is defined fixed or variable interest rate solutions which can help one garner cash out of available equity in the home if pledging ones’ residential property as collateral. This equity can be used for home improvements, debt consolidation or unexpected expenses. This method of converting the home equity into cash payment while retaining the ownership of the property is very popular in the USA and is called equity withdrawal in the UK. Equity in this context will mean whatever money is invested for ownership or control of the property in question.

In case of the USA, qualifying for a reverse mortgage requires that the person should be at least 62 years of age and that he has paid off all his previous mortgages including the proceeds from the reverse mortgage and additional personal funds. It should be noted that there are no minimum income or credit requirements and the money is permitted to be used for any purpose. Reverse mortgage loans are not taxable and do not affect Social Security or Medicare Taxes; however, the limit that can be advanced as loan against the home equity depends on various factors such as the age of the borrower, the location of the house and so on. The starting interest rate (effective upon closing/finalization of the loan), the appraised value of the property by the Federal Housing Association (FHA) and Fannie Mae will also have an impact in determining the maximum amount Reverse Mortgage. Reverse mortgages for homes valued above the Fannie Mae limit is called cash accounts or proprietary loan products. Reverse mortgage loans are offered by some state and local governments; however pending bankruptcies or lower value mobile homes may slow down the process of obtaining these loans.

Default on reverse mortgages should be avoided and taxes and insurance on the loan amounts should be updated at all times. One can opt for an escrow account to help pay for these expenses but it has been found that the practice is not very popular among reverse mortgage borrowers. Costs on the reverse mortgage will tend to be high if obtained from private sources. However various costs such as insurance premium, origination fee in addition to the normal closing costs and appraisal fees influence the final bill of the reverse mortgage program one wants to buy.

Some programs will waive the initial costs if the borrower is willing to borrow the maximum or close to the maximum amount that he is eligible to receive.

These will lead to substantial variance in the reverse mortgage costs. But it should be noted that the costs of the reverse mortgage can be financed through the loan itself with the costs and fees directly rolled into the principal balance of the loan with the borrower not needing to make any cash payments.

Although this allows individuals with little or no money go for reverse mortgage, this also has the rider that it the principal amount increases and so does the interest fees. On this matter, interest rates on reverse mortgages are generally of the Adjusted Rate Mortgage type on annual or semi-annual monthly basis. As the tenure of the loan is not is fixed.

Some states in the USA do offer reverse mortgage loans at lower rates of interest. Due to rising cost of pensions and health care, reverse mortgages provide a boon to elderly citizens who can convert an illiquid asset like their house into liquid cash flows.
As previously mentioned, the reverse mortgage ends with the death of the owner of the house or if he vacates the house for 12 consecutive months or more. The reverse mortgage can be paid off at this juncture by the sales proceeds of the house or by refinancing by the homeowner’s heirs.

In case of the USA, the most popular reverse mortgages is the FHA-insured Home Equity Conversion Mortgage (HECM) which accounts for more than 90% of the home equity loans in the country. According to the National reverse Mortgage Lenders Association (NRMLA), the program experienced 83% rise in the first nine months of 2006 compared to the same period last year.

Other ways to tap the home equity is the home equity line of credit if one does not wish to live at one place for more than five years.

In case of India, Dewan Housing Finance Corporation Limited, a private housing finance company, has launched a reverse mortgage scheme called ‘Saksham’ that is directed at retired senior citizens with minimum 60 years of age. The Natonal Housing Bank (NHB) will soon follow suit.