The Home Equity Conversion Mortgage (HECM) more commonly referred to as reverse mortgages was created by the Federal Housing Administration (FHA). These Federally insured loans are designed for borrowers over the age of 62. They truly are a mortgage in reverse. A reverse mortgage will eliminate the borrower's current monthly payment and give them access to the available equity in their home.
Over time a reverse mortgage balance will grow. The monthly payment has been eliminated and the loan will accrue an interest charge each month which is added to the balance of the loan. This type of loan is referred to as a negative amortization loan. Rather than paying down the balance as you would on a traditional mortgage loan your loan balance grows over time. Because these loans are federally insured by the FHA there was quite a bit of thought that was put into determining the size of these loans. The size of any loan as compared to the value of the home is known as the loan to value ratio. On a traditional or forward loan through the FHA you can cash out up to 85% of your home's value. The remainder, after you have paid your existing mortgage balance and customary closing cost is yours to use as you wish. A reverse mortgage's starting loan to value ratio is much lower than a traditional refinance. The FHA has a formula that takes into consideration the borrowers age, life expectancy, home value and location of the property to determine the available loan to value on a reverse mortgage. The rule of thumb is to take the youngest borrower's age and subtract 10 years to determine the maximum allowable loan to value on a reverse mortgage transaction. You should consult a reverse mortgage lender to determine what you may qualify for. The reason for this lower qualifying loan to value is twofold. First the Federal Housing Administration understands that these loans will accrue interest charges over time and the balance will grow. Second reverse mortgages were not designed for equity poor borrowers. The idea is that a typical senior has paid for their home for the majority of their adult lives and now may qualify to benefit from that increasing home equity that they have worked so hard to build.
There are four ways to access the equity in your home through a reverse mortgage program. You can take the money in a lump sum at the time of settlement as you would in a traditional loan. You can set the available equity aside as a line of credit that you can use as you need it. The line of credit option takes into account that your home will most likely appreciate over time and the available credit also increases each year that the line of credit remains open. You can use the available equity to pay your self a pre determined amount each month over a certain period of time. Finally the lender can determine, based on the available equity, a term payment. This term amount would be paid to the borrower each month for the remainder of their life.
There are some common misconceptions about reverse mortgages. One misunderstanding is that the bank owns my house when I die. If you have a traditional mortgage or a reverse mortgage and something happens to you and the payments lapse the bank does own your house and will begin foreclosure proceedings. That's the reality of any mortgage loan. Similar to a traditional loan a reverse mortgage lender will place a lien against your home for the amount owed. If you have had a legal will and testament drafted or if your property is held in trust, as is the case on a traditional loan, you are still the vested owner of the property and your heirs have a right to any available equity should something happen to you.
I lose my mortgage interest tax deduction. This one is true. This is because you are no longer paying interest instead interest is accruing against your home. The reverse mortgage has eliminated your mortgage payment. Any refund on your taxes based on mortgage interest paid will be more than made up for by the fact that there is no longer a monthly mortgage payment. Additionally, any proceeds you take from a reverse mortgage are not considered income, are not taxable and have no affect on your current social security, Medicare or Medicaid benefits.
My heirs are not over 62, if something happens to me they do not qualify for a reverse mortgage, then what? As I mentioned, you remain the vested owner of your home. If the home is left to your heirs who are under 62 years of age they have the option to sell the property or refinance the reverse mortgage loan into a traditional loan. The Federal Housing Administration considers reverse mortgages as non-recourse loans. What that means to you is that the reverse mortgage will never be greater than the fair market value of your home. Let's say you beat the odds and live a lot longer than the formulas and experts thought you would live. You live to be 110 years old. As long as you are the vested owner and the home is your primary residence the reverse mortgage will remain outstanding against your home. After your passing the reverse mortgage has grown to a balance of $125,000.00. Your heirs look at the neighborhood and surmise that they can not get anymore than $120,000.00 for the home. They list the home, accept offers and will need to have the property appraised. If it is determined that $120,000 is actually the fair market value of the home; as a non-recourse loan the reverse mortgage with a $125,000.00 balance will be considered paid and satisfied after the fair market sale of the home of $120,000.00.
The intention of this article was to give the reader a better understanding of what a reverse mortgage is, how it works and to address some of the more common misunderstandings about reverse mortgages. I am sure that you probably have more questions. If your home is in Arizona and I can be of further assistance, please visit my web site [http://www.az-homeloan.com] for additional information. The most important thing is that you contact a trusted mortgage professional to answer your questions and guide you through the reverse mortgage process.
Over time a reverse mortgage balance will grow. The monthly payment has been eliminated and the loan will accrue an interest charge each month which is added to the balance of the loan. This type of loan is referred to as a negative amortization loan. Rather than paying down the balance as you would on a traditional mortgage loan your loan balance grows over time. Because these loans are federally insured by the FHA there was quite a bit of thought that was put into determining the size of these loans. The size of any loan as compared to the value of the home is known as the loan to value ratio. On a traditional or forward loan through the FHA you can cash out up to 85% of your home's value. The remainder, after you have paid your existing mortgage balance and customary closing cost is yours to use as you wish. A reverse mortgage's starting loan to value ratio is much lower than a traditional refinance. The FHA has a formula that takes into consideration the borrowers age, life expectancy, home value and location of the property to determine the available loan to value on a reverse mortgage. The rule of thumb is to take the youngest borrower's age and subtract 10 years to determine the maximum allowable loan to value on a reverse mortgage transaction. You should consult a reverse mortgage lender to determine what you may qualify for. The reason for this lower qualifying loan to value is twofold. First the Federal Housing Administration understands that these loans will accrue interest charges over time and the balance will grow. Second reverse mortgages were not designed for equity poor borrowers. The idea is that a typical senior has paid for their home for the majority of their adult lives and now may qualify to benefit from that increasing home equity that they have worked so hard to build.
There are four ways to access the equity in your home through a reverse mortgage program. You can take the money in a lump sum at the time of settlement as you would in a traditional loan. You can set the available equity aside as a line of credit that you can use as you need it. The line of credit option takes into account that your home will most likely appreciate over time and the available credit also increases each year that the line of credit remains open. You can use the available equity to pay your self a pre determined amount each month over a certain period of time. Finally the lender can determine, based on the available equity, a term payment. This term amount would be paid to the borrower each month for the remainder of their life.
There are some common misconceptions about reverse mortgages. One misunderstanding is that the bank owns my house when I die. If you have a traditional mortgage or a reverse mortgage and something happens to you and the payments lapse the bank does own your house and will begin foreclosure proceedings. That's the reality of any mortgage loan. Similar to a traditional loan a reverse mortgage lender will place a lien against your home for the amount owed. If you have had a legal will and testament drafted or if your property is held in trust, as is the case on a traditional loan, you are still the vested owner of the property and your heirs have a right to any available equity should something happen to you.
I lose my mortgage interest tax deduction. This one is true. This is because you are no longer paying interest instead interest is accruing against your home. The reverse mortgage has eliminated your mortgage payment. Any refund on your taxes based on mortgage interest paid will be more than made up for by the fact that there is no longer a monthly mortgage payment. Additionally, any proceeds you take from a reverse mortgage are not considered income, are not taxable and have no affect on your current social security, Medicare or Medicaid benefits.
My heirs are not over 62, if something happens to me they do not qualify for a reverse mortgage, then what? As I mentioned, you remain the vested owner of your home. If the home is left to your heirs who are under 62 years of age they have the option to sell the property or refinance the reverse mortgage loan into a traditional loan. The Federal Housing Administration considers reverse mortgages as non-recourse loans. What that means to you is that the reverse mortgage will never be greater than the fair market value of your home. Let's say you beat the odds and live a lot longer than the formulas and experts thought you would live. You live to be 110 years old. As long as you are the vested owner and the home is your primary residence the reverse mortgage will remain outstanding against your home. After your passing the reverse mortgage has grown to a balance of $125,000.00. Your heirs look at the neighborhood and surmise that they can not get anymore than $120,000.00 for the home. They list the home, accept offers and will need to have the property appraised. If it is determined that $120,000 is actually the fair market value of the home; as a non-recourse loan the reverse mortgage with a $125,000.00 balance will be considered paid and satisfied after the fair market sale of the home of $120,000.00.
The intention of this article was to give the reader a better understanding of what a reverse mortgage is, how it works and to address some of the more common misunderstandings about reverse mortgages. I am sure that you probably have more questions. If your home is in Arizona and I can be of further assistance, please visit my web site [http://www.az-homeloan.com] for additional information. The most important thing is that you contact a trusted mortgage professional to answer your questions and guide you through the reverse mortgage process.
