Reverse Mortgage: What’s it all about?
Exactly what is a Reverse Mortgage? A Reverse Mortgage is a special type of loan for seniors age 62 and above that can turn the untapped equity in your home and give back – finally – to it’s owner.
As the name implies, a Reverse Mortgage works in reverse. Instead of equity growing as the loan is paid (like in a “forward” loan), because no mortgage payments are made this is considered a decreasing equity loan. But even so, it’s a great concept!
Reverse Mortgages are a great way to access equity in your home without giving up title or paying a new monthly mortgage payment. If your home is your primary residence you can obtain a Reverse Mortgage. Not everyone needs a Reverse Mortgage or even wants one. But they do serve a good purpose for many and can even rescue a senior homeowner from foreclosure. Even homeowners who are currently in bankruptcy can secure a Reverse Mortgage if there is enough equity remaining in their home. And those who have an existing mortgage, as long as there’s enough equity, may qualify for a Reverse Mortgage.
What Can a Reverse Mortgage Be Used For? Reverse Mortgages can be used for any purpose: travel, buying a new car, helping grandkids with college tuition, paying bills, getting rid of a current mortgage, taking care of medical expenses, just enjoying life a little more. Reverse Mortgages are guaranteed by the Federal Government and offer an adjustable or fixed rate. They can be structured for your own lifestyle and needs — as a monthly check to you (or directly deposited into your bank account), a lump sum at closing, a line of credit for future use, or a combination of all three. In fact, you can also set up a term loan for a certain amount of years which would increase your monthly proceeds. Your payments will end when the term is up, but you get to remain in your home; you are not forced to move just because the term ends.
When Did Reverse Mortgages Start? Reverse Mortgages have been changing the lives of senior homeowners for over forty years, but only since 1987 have they actually been federally guaranteed under the HECM program, meaning Home Equity Conversion Mortgage.
What’s the big mystery? Too often I’ve heard homeowners say, “I won’t own the house anymore after I do this, right?” And I wonder where that information came from. I always clarify that if your previous mortgage did not cause you to lose ownership of your home, why wuld a Reverse Mortgage be any different? Banks can’t take title to your home unless there is a foreclosure proceeding. Further, just like other mortgages, a Reverse Mortgage IS a mortgage– that means the lender (mortgagee) takes an interest in the property but NOT ownership.
For Reverse Mortgages to be understood we need to demystify the entire concept. For some strange reason there is a great mystery surrounding Reverse Mortgages. Actually the concept is fairly simple. Perhaps lenders and originators (loan officers) unwittingly encouraged this, and perhaps more education has been needed. Over the past few years Reverse Mortgage lenders have geared media campaigns toward senior homeowners, and this has been great. But more education is needed because false information still exists.
It is my considered opinion if you give enough people enough information, people make better decisions.
Seniors are no different than anyone else. They aren’t ignorant or naive, and they certainly want to learn more about one of the most important decisions they may make about their future. Educating oneself is imperative when it comes to big decisions, and a Reverse Mortgage warrants careful consideration
How Does a Reverse Mortgage Work? A Reverse Mortgage works like a typical mortgage, but it works in reverse. Rather than you paying a monthly mortgage payment to the bank, the bank pays you! Rather than qualifying with your credit score or your income, you qualify with your age and the value of your home. Unlike an equity loan if you choose the line of credit option and don’t draw all of the money out, it will grow. It’s a unique and amazing concept, one that causes me to marvel every time I close a Reverse Mortgage loan.
How does one qualify, and what are the parameters for getting a Reverse Mortgage? To get a Reverse Mortgage you must be at least 62 years of age. (The loan is based on the age of the youngest borrower.) Your home must be your primary residence where you reside most of the calendar year. Your home can be a 1-4 family dwelling, a condo, townhouse, or manufactured home, but not a co-op or mobile home. (Co-op Reverse Mortgages may be in the offing this year.)
How Much Money You Get: The amount of proceeds you receive is determined by age, value of home, and current interest rates. Fixed rates are usually proprietary to each lender. Adjustable rates are based on indexes (more correctly known as indices), and then the lender adds a margin (how much they will make.) There is the note rate which is also called the applied rate as it’s applied to your balance over time. But it’s not the Applied Rate or Note Rate that determines how much money you’ll get at closing.
Now, before I proceed, if you don’t like technical stuff don’t bother reading this part — but I believe every reader will be able to grasp this information. The rate that determines your available proceeds (called the Principal Limit / what you can borrow) is called the Expected Rate. Besides the Applied Rate and the Expected Rate we also learn there are also two indices, i.e., a variable benchmark interest rate that serves as an index for adjustable rate mortgages. The portion the bank gets (margin) is added to the index, and that is how you get your interest rate. This is called the fully indexed rate.
There are two indices used for Reverse Mortgages: the LIBOR index and the CMT index. Libor means London Interbank Offered Rate and CMT means Constant Maturity Treasury index. The first index, LIBOR, is the rate that banks participating in the London money market offer each other for various short term deposits. LIBOR rates are published by the British Bankers Association at 11am daily and represent countries in each currency.
NOTE: The CMT index is published on the U.S. Federal Reserve Board’s website along with other rates like the swap rates, commercial paper, eurodollars, etc. The page you can access to find this information is:
http://www.federalreserve.gov/releases/h15/current/h15.htm
The page that links to this page is http://www.FederalReserve.gov, and you would look for “All Statistical Releases”, then click on “Interest Rates” and then click on “Weekly”. You’ll see a list of indices and rates, and columns. Look for the CMT, and you can check the index you are looking for.
CMT: What is it? The “CMT index is essentially a ‘theoretical’ set of securities that is based on recent auctions of actual securities. These actual securities include bills of one, three, and six months,bills of two, three, five, ten, and thirty year notes, as well as the ‘off-the-runs’ in the seven to twenty year maturity range. CMT rates are also referred to as Treasury Yield Curve Rates. The most widely used mortgage CMT index is the 1 Year Constant Maturity Index. In fact, about 50% of all arms are based on this one. It is also known as the 1 Year T-Bill or 1 Year Treasury Spot Index. ( http://www.ascendantfinancial.com)
The One to Watch: The Expected Rate is the rate to watch because that is the rate which determines your bottom line, what proceeds you’ll get at closing. Sure, both the Applied Rate and Expected Rate are important, but always remember the Expected Rate is what will determine how much money you can borrow. If you’ve got a savvy loan officer they’ll be smart enough to check rates before ordering your appraisal.
If You Don’t Pay Anymore Mortgage Payments, What Are You Responsible for? You continue paying taxes and homeowner’s insurance and maintain your home as always. You are responsible to keep your home in good condition as the bank has an interest in your home.
Study and Learn – Only you can determine if a Reverse Mortgage is right for you. Study Reverse Mortgage material, read articles, and ask questions. Set up a consultation with a Reverse Mortgage Specialist and review actual numbers and program options. Get a Good Faith Estimate (an estimate of your closing costs).
Ask the kids what they think about it. Talk to your attorney or one of your friends. But be sure you get accurate information based on facts which can only come from a Reverse Mortgage Professional who has the software that produces Reverse Mortgage comparisons.
It’s true, Reverse Mortgages are certainly not for everyone. But for many senior homeowners who just want to have more, a Reverse Mortgage may be the perfect solution.
Happy Reverse Mortgage hunting – and good luck! For further information, visit my website: http://www.ReverseMortgageLI.com
Kathie Adler - Reverse Mortgage Blog 
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