User:Whaleknives/Reverse mortgages

A reverse mortgage allows homeowners 62 and older to withdraw a portion of home equity as income or a line of credit without selling the home or making monthly payments. It has been described as a loan of last resort because it can mean fewer assets for the homeowner and heirs. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home.

Reverse mortgages saw abuses by lenders and earned a bad reputation. The number of reverse mortgages dropped from an annual peak of about 115,000 in 2009 to 30,000 in 2016, according to the Federal Housing Administration. Reverse mortgages are now regulated by the Federal Housing Administration and the Consumer Financial Protection Bureau. Like conventional mortgages, reverse mortgages are paid off when the house is sold, but the FHA covers any difference between the sale value and the mortgage balance, preventing "underwater" loans.

There are three types or reverse mortgages: FHA reverse mortgage or Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgage, and proprietary reverse mortgage.

FHA Home Equity Conversion Mortgage (HECM)
The Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM) is a federally-insured mortgage backed by the U. S. Department of Housing and Urban Development (HUD). The loans can be used for any purpose. They are more expensive than traditional home loans or single-purpose reverse mortgages and the financing costs are higher, a factor if the home stay is short or the mortgage is small.

In general, the older you are, the more equity you have in your home, and the less you owe on it, the greater the loan can be.

Unlike other FHA loans, there are no income or credit qualifications for this type of loan. A current appraisal is required as the loan amount is based on the home's value (as determined by appraisal or sale price) or the FHA insurance limit, whichever is lower. The mortgage is based on current interest rates and allows closing costs to be financed in the mortgage. There are a variety ways to receive the money, including monthly payments, a line of credit, or a combination of both. The borrower does not pay on these loans until the house is sold. The loan is repaid from the proceeds of the property sale including interest. Any remaining equity in the home after the loan has been repaid belongs to the homeowner.

Single-purpose reverse mortgage
Single-purpose reverse mortgages are the least expensive option. They’re offered by some state and local governments and non-profit organizations, but they’re not available everywhere. These loans may be used only for the purpose specified by the lender, for example, home repairs, improvements, or property taxes. Low or moderate income homeowners can qualify for these loans.

These loans are not widely available and make up a tiny percentage of the reverse mortgage market. They often go by another name, such as property tax deferral programs.

Proprietary reverse mortgage
Proprietary reverse mortgages are private loans backed by the companies that offer them. Higher-appraised homes might qualify for a bigger loan with a proprietary reverse mortgage. They are more expensive than traditional home loans or single-purpose reverse mortgages and the financing costs are higher, factor if you plan to stay in your home for a short time or borrow a small amount.

The loan size depends on the same factors as an HECM, but is limited only by the risk the lender is willing to take. These mortgages vanished after the housing bubble burst in 2008-2010, then returned when home prices rebounded. They aren’t as common as HECMs because they lack a secondary market for lenders, and cannot be easily secured by sale to Fannie Mae and Freddie Mac.

Reverse mortgage calculator
Mortgage type? Fine print? The input and output forms for the National Reverse Mortgage Lenders Association (NRMLA) calculator are shown below (click on an image for full size). The maximum loan (net loan limit) after fees for a $200,000 home was 49% of the home value, with 28% available in the first year. The interest rates were 4.2% variable (13.0% maximum) or 5.1% fixed.

Other options
Unlike a reverse mortgage, these options require monthly repayments to the lender while still living in the home. The home equity line of credit (HELOC) is more flexible than the home equity loan, and a less expensive way to borrow smaller amounts if the principal is paid back quickly. In general, a reverse mortgage is better for long-term income in spite of a reduced estate. A home equity loan or HELOC is better for short-term cash, if you can make monthly repayments and want to avoid selling.

Home equity loan
A home equity loan is a "second mortgage", a lump sum paid back over a set time period, using the home as collateral. The loan is based on the difference between the homeowner's equity and the home's current market value. The mortgage also provides collateral for an asset-backed security issued by the lender and sometimes tax-deductible interest for the borrower.

Interest rates on such loans are usually adjustable rather than fixed, but lower than standard second mortgages or credit cards. Loan terms are usually shorter than first mortgages.

Home equity line of credit
A home equity line of credit (HELOC) is more like a credit card that uses the home as collateral. A maximum loan balance is established, and the homeowner may draw on it at discretion. Interest is predetermined and variable, and usually based on prevailing prime rates.

Once there is a balance owed, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five to more than 20 years, at the end of which all balances must be paid in full. The interest is often tax-deductible, making it more attractive than some alternatives.

Tax considerations
Reverse mortgages have been suggested as a possible tool to lower income taxes in retirement (See Social Security tax impact calculator). Generally, money from a reverse mortgage is not taxable and does not affect Social Security or Medicare benefits. .