REVERSE MORTGAGE BASICS American Portfolio Mortgage Corp is an IL Residential Mortgage Licensee #MB.0005608 with the Illinois Department of Financial and Professional Regulation - Division of Banking located at 122 S. Michigan Avenue, Suite 2000, Chicago, IL 60603 NMLS ID 175656
The reverse mortgage program allows senior citizens to take money back out of their homes. Based on the equity in the home, a lender sends a tax-free lump sum or monthly payment to the homeowner, according to the National Reverse Mortgage Lenders Association. The homeowner then pays interest on the money provided to her. The program, which is available to people older than 62 who own a home, has existed for more than 50 years.
First Reverse Mortgages
Agent Nelson Haynes of Deering Savings & Loan in Portland, Oregon, made the first reverse mortgage in 1961. It was more than 15 years later, in 1977, when Broadview Savings & Loan in Independence, Ohio, formally introduced the first reverse mortgage program, called “Equi-Pay.”
The 1980s were the decade when reverse mortgages really took off. After 20 years of experimentation by small firms, the federal government began looking at a reverse mortgage program, according to Reverse.org . The 1980s were also when reverse mortgage programs were first mentioned in national media—in Time and Newsweek magazines and on “Good Morning America.” In 1984, the first open-ended reverse mortgage was offered by American Homestead in New Jersey; the company subsequently expanded into much of the U.S. Two years later, AARP established the Home Equity Information Center to help seniors research financial options.
U.S. Government and Reverse Mortgages
After years of debate, Congress passed a federal reverse mortgage insurance proposal in 1987. The federal government made its first reverse mortgages in 1989, and the program was capped at 50,000 loans through the year 2000, according to the U.S. Department of Housing and Urban Development. Before the program expired in 1996, HUD asked for it to be expanded. HUD continues to offer reverse mortgages to senior citizens.
The National Reverse Mortgage Lenders Association was created in 1997 to help educate lenders and borrowers. In 2000, a national reverse counseling exam was introduced as more people began to take out reverse mortgages. Reverse mortgage programs remain in effect, through private lenders and the federal government, and a push has been made to make sure people understand the terms and costs of reverse mortgages, according to the National Reverse Mortgage Lenders Association. Fannie Mae introduced and continues to update consumer protections.
Regulation and Safeguards
As the loan process has evolved, counseling programs have become a mandatory part of the loan process, and the government has established limits on interest rates and fees. According to the National Reverse Mortgage Lenders Association, the federal reverse loan program is set up so that a loan can't come due during the borrower's lifetime, meaning a borrower can't be forced to leave his or her home. AARP provides education as well and publishes a reverse mortgage consumer guide to help borrowers avoid fraud
As reverse mortgages continue to grow in popularity, so have a
range of myths about these unique loans. Let’s take a look at
some of the most common misconceptions and discuss the facts.
Myth #1: The bank takes away OR I will lose my house
FACT: With a reverse mortgage, the borrower retains title to the home throughout the life of the reverse mortgage. The borrower cannot, as a result of the reverse mortgage, be forced out of his or her home as long as property taxes and hazard insurance are paid, the home is maintained in reason living condition, and at least one borrower resides the home as their primary residence. The loan must be repaid once the last borrower permanently moves out of the home.
Myth #2: The home must be debt free to qualify for a reverse mortgage
FACT: Reverse mortgages convert home equity into cash. As long as there is sufficient equity in the property, the homeowner may be eligible for a reverse mortgage. In fact, many seniors use a reverse mortgage to pay off an existing mortgage in order to eliminate a required monthly mortgage payment.
Myth #3: The bank sells the home when the reverse mortgage becomes due
FACT: The borrower is in control of the home and retains title, not the bank or lender. So while it’s common for the borrower or the heirs to sell the home to repay the loan, it’s a decision the borrower or the heirs make. The borrower or the heirs might also refinance the home in order to repay the loan.
Myth #4: My children won’t be comfortable with me obtaining a reverse mortgage
FACT: Seniors are encouraged to talk with their children about reverse mortgages. Many baby boomers are faced with trying to plan for their retirement and pay for their children’s education. Often, the children of many seniors are happy that their parents have a financial solution available to help them live more independently and financially secure.
Myth #5: The borrower could end up owing more than the house is worth
FACT: Two of the great built in safeguards of reverse mortgages are that they are structured so that the borrower can never owe more than the fair market value of the home upon repayment*. In addition, HECM products are insured by the Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development (HUD). If the borrower or the heirs want to keep the house by refinancing the debt and paying off the reverse mortgage, the borrower or heirs must payoff the balance in full, regardless of the value of the property. If the last borrower has moved out of the property and the property will be sold in an arm’s length transaction, the property may be sold for the fair market value and neither the borrower’s estate nor the heirs will be responsible for a deficiency balance.
Myth #6: Reverse mortgage proceeds will impact Social Security and Medicare benefits
FACT: A reverse mortgage will generally not affect regular Social Security payments or Medicare benefits. Depending upon the borrower’s situation, a reverse mortgage may affect benefits one receives, if any, from the Federal Supplemental Security Income (SSI) program, or state-administered programs like Medicaid. It is recommended that the borrower speak with his or her financial advisor and appropriate governmental agencies.
Myth #7: There are restrictions on how the money is used and taxes will have to be paid on it.
FACT: Actually there are no restrictions. The cash proceeds from a reverse mortgage can be used for almost any purpose and since it’s already your money, it’s tax-free. Many seniors have used reverse mortgages to travel, pay off debts, help their kids, make a luxury purchase or just live more comfortably
Myth #8: Reverse mortgages are only for seniors in need, or for the ‘house rich, cash poor.’
FACT: Reverse mortgages are an excellent financial planning tool that has been used by homeowners from all walks of life to enhance their retirement years. In fact, with the new 2009 lending limit, many seniors are benefiting from increased cash benefit from a reverse mortgage.
DO: Talk to a professional from a reliable company that is built on experience and specializes in the reverse mortgage industry. This will ensure that you are informed about all the options available.
DON’T: Work with someone who is pressuring you, trying to sell you other products, or who tells you not to inform your family or advisor. If that happens, give American Portfolio Mortgage Corp a call and we will be happy to give you an objective opinion.
DO: Consider using your reverse mortgage advances to pay for long-term care expenses, including your premium for a long-term care policy. If your concern is to be sure you can stay in your home, even in the event of future health concerns, this can be a tremendous planning option.
DON'T: Put the money from a reverse mortgage line of credit into your savings account or a CD in order to offset the interest. Interest only accrues on your reverse mortgage monies as you stick them in your pocket. A line of credit is not available on all reverse mortgage programs. Please contact us for further details.
DO: Consider leaving unused proceeds from your reverse mortgage in a line of credit, which can serve as an additional tax-free savings account. When you need the money, all you have to do is request an advance. Only then will interest start accruing on the monies you withdraw. The monies you do not use will be growing in your line of credit for future use.
DO: Consider using the tax-free proceeds of a reverse mortgage rather than withdrawals from your tax-deferred investments, such as an IRA or 401(k). We encourage you to talk with your tax or financial advisor to consider whether or not this is appropriate for you. If you’re interested in learning more about reverse mortgages, American Portfolio Mortgage Corp. has the experience to help you understand the options and find the reverse mortgage that’s specifically tailored to fit your financial needs
National Reverse Mortgage Lenders Association® http://www.reversemortgage.orrg
American Portfolio Mortgage Corp is an IL Residential Mortgage Licensee #MB.0005608 with the Illinois Department of Financial and Professional Regulation - Division of Banking located at 122 S. Michigan Avenue, Suite 2000, Chicago, IL 60603 NMLS ID 175656