Reverse Annuity Mortgage

Reverse Annuity Mortgage

A reverse annuity mortgage (RAM), home equity conversion mortgage (HECM), or reverse mortgage (RM), is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash. In a typical mortgage, you make monthly principal and interest payments. Over time, the loan balance decreases as you build up equity in your home, until at the loan's term you own the home. A reverse mortgage turns around this process. With a reverse mortgage, the borrower receives money for the equity in their home. As they receive money, the equity in their home declines and their loan balance increases.

With a reverse mortgage, the homeowner continues to own their home. While the amount of the homeowner's loan increases over time, a reverse mortgage cannot grow to more than the value of the house. In addition, a lender cannot seek payment for a reverse mortgage from anything other than the value of the house. Other assets and the assets of the borrower's heirs are protected by what is referred to as a "non-recourse" limit.

A reverse annuity mortgage should not be confused with a home equity loan or home equity line of credit (HELOC), both of which are other ways of obtaining money for the equity in a home. With either an equity loan or a HELOC, the borrower must pay at least the monthly interest due on the loan amount received, or the amount that they have drawn from their equity line. With a reverse mortgage the borrower does not have to pay anything until the loan is paid off.

Qualifying for a Reverse Mortgage

To obtain a reverse mortgage, all of the owners of a home must apply for the reverse mortgage and sign the appropriate loan paperwork. To qualify for a reverse annuity mortgage the borrower or borrowers must:

  • Own their own home without any existing mortgages or liens. A reverse mortgage is typically a first mortgage and their usually cannot be any other mortgages such as second mortgages or equity lines of credit.
  • Be at least 62 years of age or older.

Reverse Mortgage Loan Amounts and Payments

The amount of money that a borrower may receive from a reverse annuity mortgage is influenced by several different factors, including:

  • The specific reverse annuity mortgage program that the borrower selects
  • The type of cash advances received (for example, lump sum distribution versus monthly payments)
  • The borrower's age (in general, the older an individual is, the more cash they may receive)
  • The value of the borrowers's home (the more valuable the home, the more cash the borrower will receive)

The cash obtained from a reverse annuity mortgage may be distributed in one or more of the following ways:

  • As a single lump sum payment
  • As a regular monthly amount or cash advance
  • As a credit line account that the borrower can draw upon as needed

Types of Reverse Annuity Mortgages

There are many different types of reverse annuity mortgages. Some types of reverse mortgages are more expensive than others. The types of reverse mortgages that are currently available include:

  • Reverse mortgages that are offered by state/local governments (often referred to as "single purpose reverse mortgages"). These reverse mortgages are typically the least expensive. They may also be more restrictive on how the money is distributed and can be used.
  • Federally insured Home Equity Conversion Mortgages (HECM). These reverse annuity mortgages are typically less expensive than other private sector reverse mortgages, but more expensive than RMs obtained from state/local governments.
  • Private sector or proprietary reverse annuity mortgages.

Common Features of Reverse Annuity Mortgages

Following are some of the more common features of reverse mortgages that have not already been mentioned in this article:

  • All reverse mortgages typically charge origination fees and closing costs. Reverse mortgages that are insured also would charge insurance premiums. Sometimes reverse mortgages charge mortgage servicing charges. These costs can either be paid for with cash or added to the loan balance.
  • Reverse mortgages will use up some or all of the equity in your home. This will leave less assets for a borrower's heirs to inherit.
  • Reverse mortgage advances are not taxable. They also do not affect Social Security or Medicare benefits. This may also be true of Supplemental Security Income and Medicaid benefits.
  • Reverse mortgage plans may have either a fixed or an adjustable interest rate.
  • Interest on reverse mortgages may not be deducted from income taxes until some or all of the reverse mortgage is paid off.

Repayment of Reverse Mortgages

During the life of a reverse mortgage the amount of the loan balance increases as the borrower receives more money. This amount cannot exceed the value of the home as has already been mentioned. At some point in time, a reverse mortgage must be paid off, at which point the mortgage balance and accrued interest is paid back. Repayment of a reverse mortgage typically happens when:

  • The last owner of the property named on the loan dies
  • The home owner(s) sell the home
  • The home owner(s) permanently move out of the home

Prior to any of these conditions, nothing needs to be paid on the loan.

There are also other circumstances in which reverse mortgage lenders can require repayment of a loan prior to the above. These circumstances include:

  • The homeowner fails to pay their property taxes
  • The homeowner fails to maintain and/or repair their home
  • The homeowner fails to keep their home insured

There are also other default conditions that can cause repayment of the loan which are similar to default conditions for other mortgages (e.g., declaration of bankruptcy, donation of the home, abandonment of the home, fraud or misrepresentation, and more).

Reverse Mortgages Alternatives

Individual considering a reverse mortgage should make sure to consider all of their options. Sometimes selling a home and renting or purchasing something smaller and more "age-friendly" is an alternative to a reverse mortgage. Individuals should at least consider this so that they can make an informed decision.

Reverse Mortgage Counseling

Many types of reverse mortgages require prospective borrower counseling in order to obtain a reverse mortgage. Federally insured Home Equity Conversion Mortgages (HECMs) require counseling. Even for reverse mortgages that do not require counseling, counseling is strongly advised. Individuals considering a reverse annuity mortgage should seek counseling or the advice of a qualified financial adviser.

Reverse Mortgage Resources

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