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Reading
this page will help you make choices in the web
calculators and understand their results. Reverse
mortgages are very flexible - here you will learn
some ways that you may benefit and how they compare
with regular home equity loans.
If
you wish to jump ahead on this page, click one of
these topics ,
Five
points to remember
A reverse mortgage is a loan against your home that
requires no repayment as long as your home is your
main residence. They are "non-recourse"
loans -- the amount you owe can never exceed the net
selling price of your home. If borrowers live
beyond their life expectancy (by definition half of
us will), a reverse mortgage can be a very favorable
choice. If you die prematurely, your annual loan
cost will be higher.
- you
will still own your home. A reverse
mortgage is just a loan. If you sell your
home, the loan is repaid and you or your
heirs receive the leftover home equity.
- If
it turns out that the loan balance is
greater than your home's net selling
price, the government (or the lender such
as Fannie Mae) makes up the difference.
This is what "non-recourse"
means.
- loan
advances to you are not taxable. They are
disbursements of principal, not income.
- the
loan is not due on any specific date and
there are no payments. You can live in
your home as long as you wish without
repaying the loan (you still own your home
and must keep insurance and property taxes
current.)
- if
you are uncomfortable with the words
"Reverse Mortgage", consider
calling it "Equity Redemption."
It's your home -- you can redeem some of
its equity now, without selling it.
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Increase
your cash reserves
- reverse
mortgages allow you to set up a
line-of-credit (a "cash
account") and draw funds whenever
you wish
- stop
worrying/increase your peace of mind -
with a cash account for "rainy
day" expenses, emergencies,
unexpected needs, larger than expected
costs
- improve
your everyday life by increasing your
immediate financial capacity; have more
cash readily available to enhance daily
living; untighten your monthly budget
- increase
your financial flexibility with a cash
account so you can take advantage of
future opportunities: buy at a bargain
price, get married, do it now while you
can
- you
can repay some or all of your cash
account principal, then draw some or all
of the money out again whenever you wish
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With
a HUD HECM reverse mortgage, the lending limit of
the cash account (line-of-credit) grows each month
at the loan's effective interest rate. This ensures
that you can enjoy your cash account's full benefit
whether you draw cash quickly or save it for a rainy
day.
Imagine
two borrowers, Mrs. Jones and Mrs. Smith with
initial cash accounts that have the same limit. Mrs.
Jones uses hers immediately by drawing all the
available money. Mrs. Smith saves hers for future
use. Five years later, Mrs. Smith can draw a
larger amount -- actually matching the loan
balance of Mrs. Jones line-of-credit account. Why
does this make sense for the lender? Because
whenever the cash accounts are eventually drawn to
100% of their limits, the two loans will have the
same balance due.
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|
Mrs.
Jones |
Mrs.
Smith |
|
Initial
Cash Account |
$
65,000 |
$
65,000 |
|
Immediate
Cash Withdrawal |
-
65,000 |
0 |
|
Funds
Available Now |
$
0 |
$
65,000 |
|
Five
Years Later |
|
Cash
Account Limit |
$
88,472 |
$
88,472 |
|
Cash
Account Principal |
-
65,000 |
0 |
|
Cash
Account Interest |
-
23,472 |
0 |
|
Available
Funds |
$
0 |
$
88,472 |
Increase
your monthly income
- reverse
mortgages allow you to set up regular
monthly cash advances (commonly called a
home tenure plan)
- get
rid of your monthly payments (mortgage,
home equity loan, credit card
debt)
- get
tax-free monthly income (loan advances
to you are not taxable)
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Since
the new reverse mortgage will payoff your current
debt, your spending money will rise by the amount of
the payments you are making on that debt. The
example below compares a hypothetical "Current
Situation" with a tenure plan reverse mortgage.
Since tenure payments are loan advances, there is no
income tax to worry about.
|
Your
Current |
With
Reverse |
Increase
in |
|
Situation |
Mortgage |
Benefits |
| Current
Monthly Income |
$
1,700 |
$
1,700 |
|
| Payments
on Current Debt |
-
500 |
0 |
+
500 |
|
Tax-free Loan Advances to you |
|
600 |
+
600 |
|
Your Monthly Spending Money |
$
1,200 |
$
2,300 |
+
1,100 |
Take
cash now
- reverse
mortgages allow you to withdraw cash
immediately. You can take any portion or
all of the funds available to you as
"Upfront Cash"
- feather
your nest - renovate/improve/repair your
home; refurnish your home.
- enjoy
life (travel, hobbies, buy a TV,
computer, new car, RV)
- take
care of yourself and any health or
medical needs
- finance
a divorce settlement. One spouse can
retain the home and buy out the other's
equity with the proceeds from a reverse
mortgage.
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Your
kids and their kids
- you've
saved during your whole life; your home
is your nest egg; a reverse mortgage
allows you to use some of your home
equity now without selling your home
- be
independent of your kids; don't worry
about being a burden
- help
your kids directly now, when they may
need it, rather than later (via your
estate) when they may need it less or
not need it
- put
your grandchildren through college;
current tax law allows grandparents to
directly fund a college education
without incurring federal gift taxes
- alternatively
- die broke, disinherit your kids,
redraft your will to read: "being
of sound mind, I spent it all" --
after all, it's your home, not theirs
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Versus
a home equity loan
- regular
home equity loans require you to make
monthly interest payments; with a
reverse mortgage no monthly payments are
due
- you
must qualify for a home equity loan;
with a reverse mortgage there are no
income requirements and much less credit
history scrutiny
- home
equity loans have a due date when you
must pay back the entire loan balance;
reverse mortgages are not due until your
home is no longer your principal
residence
- home
equity loans may initially give you a
higher percentage of your home's value,
but that is because you make payments on
them to keep the loan balance level; a
reverse mortgage accrues its interest
and the loan balance grows. Simply put,
over time a reverse mortgage will most
likely give you more spending money than
a home equity loan.
- home
equity loans give the same percentage of
your home's value whether your 62 or 82,
but that is because they have a fixed
due date; reverse mortgages generally
give more to older borrowers since
someone 82 will probably stay in their
home fewer years than someone who is 62
- there is no fixed due date for you to
worry about.
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