- Personal Finance
How a Reverse Mortgage Works
This is about a reverse mortgage in the United States. A reverse mortgage is a home loan that provides cash payments to you based on home equity. Homeowners usually defer payment of the loan until they die, sell, or move out of the home.
To qualify for a reverse mortgage you must be at least 62 years old and occupy the property as your principal residence. I decided to write this article on April 21, 2014 after seeing many TV commercials for it. I wanted to know what it is. There are 10,000 baby boomers turning 65 each day.
This loan that you do not have to pay back is not a taxable income (or an income of any kind) so it will not affect any other incomes that you have. It was designed to help out older people that are retired.
The AARP (American Association of Retired Persons) says that a reverse mortgage is a loan you borrow against your home, that you do not have to pay back for as long as you live there. Many seniors have houses that are worth a lot of money but do not have a lot of cash to spend.
Here is a HUD.GOV webpage from the U.S. Department of Housing and Urban Development. It tells about Home Equity Conversion Mortgages (HECMs). It says:
HECM's are the only reverse mortgage program insured by the [U.S.] Federal Government. HECM loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
According to them the number of reverse mortgages has seen a phenomenal increase from 18,000 in 2003 to more than 107,000 in 2007. Before reverse mortgages became available in the late 1980s, retired homeowners who needed cash had very few options. They could sell and then move into a rental property, buy something smaller or move in with family members.
In the first picture above and to the right, it mentions peace of mind. But true peace of mind that goes along with happiness is an inner experience and is not part of the physical world that we only visit for a short time. There is the saying that money cannot buy happiness but it is not really accepted.
One of the widely accepted people that is known to be an expert on peace of mind and happiness is Eckhart Tolle. For a while he was extremely happy just sitting on a park bench. That was before he wrote a book and became famous. For my view on really finding happiness, see Is the Key to Happiness Being in the Present Moment.
The article under the picture mentioned above about peace of mind says that the CFPB (Consumer Financial Protection Bureau) reported that roughly 9.4% of reverse mortgage loans are currently in default. Now here is something that you have to watch out for.
CAUTION: Some couples were interviewed and the broker had told them that the eldest member of the couple should have the loan only in their name on the reverse mortgage deed. Then when the elder spouse dies, the younger one must pay back the loan immediately or have their home foreclosed on.
That article also explains why it it better to get a line of credit than to get the money in one lump sum. Keep in mind that the banks want to make as much money as possible even if that comes at your expense. Recently a friend of mine bought a house and he paid cash for it so he did not need to pay a fortune in mortgage costs and interest.
Some experts are advising that many do not need a reverse mortgage now but may in the future. So it may be better to do it now at today's interest rates. The U.S. Department of Housing explains that the Home Equity Conversion Mortgage is a safe plan to give older Americans greater financial security to help pay for expenses such as home improvements and/or unexpected medical bills as well as to supplement their social security income.
If you click on my name above, you can see a list of the many articles that I have and many of them are about health and how to live a longer life. For example doing yoga can help you to be old and yet not have the aches and pains that are associated with aging. Since people are living longer, senior citizens are the fastest growing part of our popultion.
The reverse mortgage loan becomes due when the borrower dies, sells the house, or moves out of the house for more than 12 consecutive months. This can also happen if the borrower does not keep up with the taxes.
If you are looking for a place to live in your retirement, the 2 most popular states for this is Florida and Arizona. Florida gets many tornadoes and the air can get very humid. In Arizona it can get very hot in the summer but the air is dryer so it feels more comfortable.
Arizona has many retirement areas where you can own a house but you must be over 50 or 55 to live there. They have gyms specifically for older people that have pools of water for people to take walks in.
Like where I live in Arizona, they built a retirement community called Sun City. Then they built a nicer one where there is a lot of golf courses called Sun City West. Then they built a nicer one called Sun City Grand and even a nicer one called Sun City Festival. It says that this is popular with snowbirds.
Snowbirds are people that live in colder areas like where they grew up during the warm months of the year. Then during the cold months of the year they live in Southern Arizona where a winter day can be over 75 degrees. Arizona is the sunniest state in the country followed by Nevada, California, New Mexico, Hawaii and the 7th sunniest state in the country, Florida, the Sunshine State.
If you think that sunlight is bad for your health, read Why the Highest Paid Model in the Country Does Not Wear Sunscreen. Also you may be interested in Buy a House With Help From the USDA.
I saw on a video that one woman had a house but no income so she was going to lose her house. You still need to pay taxes on a house that you own. She called many places but could not get any help. Then she called a place that had reverse mortgages and she was able to get the money that she needed so she could keep her car and her house.
Here is news from September 22, 2011 called Senate Says Yes to Restoring HECM Counseling Funds. It says:
The Senate Appropriations Committee yesterday restored $125 million of funding to the US Department of Housing and Urban Development, in a move that will help HUD-approved counseling agencies to continue providing their services to reverse mortgage-seeking seniors at little to no cost.