You Don’t Need To Have A Mortgage To Do A Reverse Mortgage

A reverse mortgage is often used to pay off a mortgage which improves the homeowner’s cash flow by eliminating their mortgage payments.  But you don’t have to have a mortgage to “reverse the mortgage.”

You Don't Have To Have A Mortgage To Benefit From A Reverse MortgageMy borrower, Marjorie didn’t have a mortgage on her home but did a reverse mortgage to be prepared for future needs.  She used some of the initial funds to purchase hearing aides and left the rest in a line of credit.  She was happy with her decision to do her reverse mortgage because she now has security knowing she has funds available for her needs, independence to live on her own without relying on her family for financial support, she’s maintained her dignity of being able to pay her own bills, and continues having control of her life and the ability to make her own choices.  She recently took some funds from her line of credit to make a trip from Minnesota to California to visit her daughter who lives there – she wouldn’t have been able to do this without having her reverse mortgage.

A reverse mortgage is a mortgage with special terms for seniors 62 and older that provides them cash for whatever they need or want.  Monthly mortgage payments are not required and income or credit scores are not considered to qualify. The funds can be received in a monthly payment, paid to you, a line of credit with a growth rate, a lump sum or a combination of these.  The loan is due when the home is no longer the primary residence of the borrower(s) or on the 150th birthday of the youngest borrower.  The borrower is still responsible for paying taxes, insurance and maintaining the property.

A reverse mortgage doesn’t mean you are reversing a current mortgage, it means that rather than having to make payments on a mortgage, funds can be available to you without monthly mortgage payments.

The amount loaned is based on the appraised value (determined by a FHA licensed appraiser) or FHA Lending Limit, whichever is lower, the age of the borrower, the expected interest rate and the program chosen.  Any liens or mortgages need to be paid prior to determining the amount available in a line of credit, monthly payments or lump sum.

When there are no current liens or mortgages on a property, more accessible funds are available for borrowers.

As an example, with a $200,000 home value for a 75 year old person and the current interest rate on an adjustable loan (the program that offers the monthly payment, line of credit option, lump sum or combination option; the fixed rate requires all funds be drawn in a lump sum), the amount available after closing costs is $128,805.

The $128,805 can be left in a line of credit or taken in monthly tenure payments of $767, this means you are paid this amount each month as long as you are living in the home as your primary residence.Enjoying remaining at home with a HECM reverse mortgage

If there is a current lien or mortgage that needs to be paid, say in the amount of $50,000, the amount available after paying for the current lien or mortgage and the closing costs is $78,804 which can be left in a line of credit or $469 received in monthly tenure payments.

Either situation can provide security, independence, dignity and control for borrowers but with no current mortgage to be paid off, more accessible funds are available.  The funds can be used for whatever the borrower needs or wants, such as enhancing one’s retirement, home modifications or repairs, medical expenses, home care, or even just giving that extra elbow room.

Some pertinent facts about reverse mortgages:

  • You own the home, no one else does.
  • You won’t lose your home because of a reverse mortgage – you don’t have to make monthly mortgage payments.  If you don’t pay property taxes, insurance, maintain the home or abide by other terms of the loan, the loan may be called due and payable.
  • Tax-free money – consult tax advisor but make sure they know the facts about reverse mortgages
  • The most common reverse mortgage, HUD’s Home Equity Conversion Mortgage or HECM, and only one available in Minnesota, is government insured and funds are guaranteed to be there for you.
  • You or your heirs get to keep any remaining equity after the loan balance is paid off.
  • There is no personal liability to you or your estate when repaying the loan and the loan balance is higher than what the home can be sold for.
  • There are no out of pocket costs other than the cost of the appraisal.
  • Closing costs typically become part of the loan balance.  Closing costs compare to those on a conventional or “forward” mortgage – the difference is the FHA Mortgage Insurance Premium.
  • A credit report is pulled to check for any federal liens or debts that would be required to be paid.
  • You can’t access 100% of your home value at the time of your closing – the amount available is based on your age, your home value or FHA lending limit (currently $625,500), an Expected Interest Rate and the program chosen.
  • The funds may be received in a line of credit, lump sum, monthly payments or a combination of these.
    • Line of credit grows based on the current interest rate plus 1.25%
    • Monthly payments may be received as tenure payments (for life as long as the home is your primary residence) or structured to fit your needs.
  • Historically the interest rate is lower than conventional loans.

Just because you don’t have a current mortgage doesn’t mean a reverse mortgage wouldn’t be beneficial to you.  Consider having security knowing you have funds available during your retirement years with the benefit of improved financial health just like Marjorie did.

© 2012 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

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