Reverse Mortgage
Essay Preview: Reverse Mortgage
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Table of Contents
Introduction to Reverse Mortgage
Basic Loan Features
Reverse Mortgage Products
Home Equity Conversion Mortgage (HECM)
Fannie Mae Home Keeper
Cash Account
CHIP Reverse Mortgage for Seniors
The Reverse Mortgage Workflow Ð- Customers Perspective
AWARENESS
COUNSELING
APPLICATION / DISCLOSURE
PROCESSING
UNDERWRITING
CLOSING
DISBURSEMENT
REPAYMENT
Typical Costs in Getting a Reverse Mortgage
Origination Fee
Mortgage Insurance Premium
Appraisal Fee
Closing Costs
Servicing Set-Aside
References
Appendix
Introduction to Reverse Mortgage
Traditionally there were two main ways to get cash from a home Ð-
Sell the house, which meant moving from there;
Borrow against the home, which meant one would have to make monthly loan repayments.
A ÐReverse Mortgage is a mechanism by which a home owner could obtain the money required but without having to either sell the house or be burdened with monthly repayment obligations. It is a type of loan used by older consumers as a way of converting their home equity into cash flow while retaining ownership and possession of the property.
The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Eligible property types include single-family homes, manufactured homes (built after June 1976), qualified condominiums, and townhouses. The source of funds for the money received is the equity in the home owned by the borrower. Unlike the loan balance of a conventional mortgage, which becomes smaller with each monthly payment, the loan balance of a reverse mortgage grows larger over time. The loan principal increases with each payment received, and interest and other charges accrued each month on the total funds advanced.
To qualify for a reverse mortgage loan in the United States, one must have attained the age of 62 and must have paid off all or most of the home mortgage. A Reverse mortgage allows the home owner to continue living in the home without being required to repay the loan. The proceeds of the loan are tax-free, there are no minimum income requirements, and the money received can be used for any purpose for most reverse mortgages.
Income is generally not considered by lenders when granting reverse mortgages, and it does not involve any medical tests or medical histories. The amount that can be borrowed depends on the age, the equity in the home, the value of the home, and the interest rate.
The home owner can be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three. The loan advances, which are not taxable, generally do not affect Social Security or Medicare benefits, since they constitute an asset exchange and not an income. However, reverse mortgages tend to be more costly than traditional loans. They also use up all or some of the equity in a home.
Basic Loan Features
Although there are different types of reverse mortgages, there are certain basic features which are common to them.
Eligibility – To qualify for a reverse mortgage in the United States, the following conditions have to be fulfilled:
The homeowner must be at least 62 years old. In the case of a couple or co-owners, it is required that each be 62, if their names appear on the title to the home. If one spouse or co-owner is under 62, then that persons name has to be removed from the title so that the other person can qualify for the reverse mortgage.
The homeowner must have equity in the home. One may however qualify even if there is an outstanding balance on the first mortgage.
Reverse mortgages are available only for homes occupied by owners as a principal residence.
Loan Size – This depends on a certain factors, including:
The borrowers age at the time of loan closing;
The value of the home;
The amount of built-up home equity;
Interest rates at the time of origination.
Other factors are the type of reverse mortgage product and particular payment option selected.
Cash flow options – The borrower decides how to receive the money generated by a reverse mortgage. In general, the payment options are:
An upfront lump sum payment;
Establishing a Line of credit that is available to be drawn upon by the borrower;
Fixed monthly payments for as long as the borrower remains in the home (or a predetermined, shorter period);
A combination of monthly income and line of credit.
Mortgage costs & fees – Much of the same costs of home purchase mortgages apply to reverse mortgages. The home owner is normally charged an origination fee, an upfront mortgage insurance fee (in case of FHA Home Equity Conversion Mortgages), an appraisal fee, and certain standard closing costs. In most cases these fees and costs are capped and may be financed as part of the reverse mortgage.