Reverse Mortgages Explained

WHAT IS REVERSE MORTGAGE?
A reverse mortgage is a low-interest loan for senior homeowners that uses a home’s equity as collateral. The loan amount is a percentage of the home’s value determined by the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.

Eligibility for a reverse mortgage (HECM):
To be eligible for a HUD reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must be owned free and clear or have a mortgage balance that is no more than approximately 65% of the home’s value. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing. There are no income or credit requirements for a reverse mortgage.

Eligible home types:
Almost all home types are eligible. However, mobile homes must be built in the last 30 years, the land must be owned, it must be on a permanent foundation, and it must meet an FHA inspection.

Difference between a reverse mortgage and a home equity loan:
Generally a home equity loan, a second mortgage, or a home equity line of credit have strict requirements for income and creditworthiness. Also, with other traditional loans the homeowner must still make monthly payments to repay the loans. A reverse mortgage has no income or credit requirements and instead of making monthly payments, the homeowner receives payments.

With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home. The older the homeowner, the lower the interest rate. The more valuable the home (up to a certain point), the higher the loan amount will be.

As stated previously, with traditional loans the homeowner is still required to make monthly payments, but with a reverse mortgage the loan is not due as long as the homeowner lives in the home. Also, with a reverse mortgage one cannot be forced to forclose or forced to vacate the home because of a missed mortgage payment. However, the homeowner is still responsible for real estate taxes, insurance, and maintenance.

Outliving the reverse mortgage:
A reverse mortgage can not be outlived. As long as at least one homeowner lives in the home (keeping taxes and insurance current) the loan does not need to be repaid.

Estate inheritance:
In the event of death or in the event that the home ceases to be the primary residence, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale.

If the equity in the home is worth more than the balance of the loan, the remaining equity belongs to the heirs. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.

If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA.

Loan limit:
The amount that is available depends on three factors: age (older is better), current interest rate, and appraised value of the home. Use the calculator to determine exactly how much could be drawn.

Distribution of money from a reverse mortgage:
There are several ways to receive the proceeds of a reverse mortgage and one can mix and match as needed.

Lump sum – a lump sum of cash at closing.
Tenure – equal monthly payments as long as the homeowner lives in the home.
Term – equal monthly payments for a fixed number of years.
Line of Credit – draw any amount at any time until the line of credit is exhausted.


Friday, May 28, 2010

Senior Housing Solutions: Parents As Room Mates

Some of our most critical decisions are made regarding the housing of our parents. It is a wrenching decision to have mom or dad move in with us because they can’t be alone. For elderly that are capable but fragile it is an especially bitter pill to take. Losing independence is frightening and it is easy to become resentful. Not to mention the overall chaos the upheaval causes the entire family. Children forced to give up their rooms. Parent child dynamics aroused from years ago. And then there is the in-law demon that invariably raises it ugly head no matter how much sensitivity is used.

When you look at the usual alternatives, it is often too expensive. One seldom considered, yet very positive solution is for the parent to either take in or become a roommate. There are a lot of wonderful seniors who are looking for a place to call home but don’t particularly relish moving in with their adult children and their grandchildren. On the other hand there are many independent and healthy seniors who probably should not be living alone, but the prospect of giving up their home is devastating.

The roommate concept has been used by college students, single parents, and traveling professional for years. I have had a roommate for the past 12 years and the income ($600 $700 per month) is not the only benefit. I live alone and work long hours and I travel. With a roommate there is usually someone here to keep an eye on things. My roommates are well screened with full credit checks, and a binding lease, They become a part of the family allowing my children and grandchildren to meet interesting new people and we have lively discussions about so many things. I have visited my ex-roommates in Cleveland, New York, Moscow and Lithuania. Some of my roommates have been actresses and teachers, students and highly talented craftsmen.

You can choose a place as near or far from your home as you wish for a parent and also choose amenities that work for the parent. A close by senior center is ideal, where they can walk for activities and lunch. Perhaps shopping or libraries are considerations. Once you have determined the important aspects of daily life you can hone in on the area that you want to investigate for housing.

Where do you find this type of housing? Craigslist is the best I have found. The site is everywhere and it is anonymous until you want to contact the person by phone or email. Another is roommate.com. Often word of mouth is a good source. I have gotten many roommates from people who know someone looking for a room. There are many people renting out rooms in lovely homes. The main concern is for compatibility on both sides.
The great thing about a roommate relationship is you can choose the situation that best fits your needs or situation. An older person with a much younger person is not ideal, nor is an active family apt to fit a quiet senior. Interestingly in roommate situations there is no recipe. Having a cup of tea as an interview process tells a lot about the level of comfort between the two.

The best situation is one other occupant, full use of the house and indoor laundry. If a parent is moving out of their home to be close to family and giving up a degree of autonomy, they do not want to be delegated to a room and a bath. By the way a shared bath is not the worst thing to consider. Many seniors have lived at some point with one bath and if they were living with family it would be the equivalent of one bath if divided by a family of 4 or 5 even if there were 2 baths.

Often the argument to being a roommate is well founded: privacy issues, security, compatibility and adjusting to a new situation…and just how is that different if you are uprooted and placed in the midst of a situation that disrupts a whole family? Some families embrace the sandwich generation concept and that is to be cherished. But
often it is not so slam dunk. It is a true burden. With honest communication and loving agreement an alternative can be found that not only benefits but enriches everyone.