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Information You Need to Know About Reverse Annuity Mortgages

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Reverse Annuity Mortgage Quick Facts

  • Must be older than 62 years old
  • The borrower continues to own the home
  • A reverse mortgage will not exceed the agreed upon value of the home
  • Allows a home owner to slowly receive the equity form their home while still living in the home
  • Must own your home with no existing liens or mortgages
  • Almost all Reverse Annuity Mortgages charge origination or closing fees
  • Other assets of the borrower and the borrowers heirs are protected by a “no-recourse” limit
  • Will not affect your social security or Medicare benefits

What is a Reverse Annuity Mortgage?

The concept of reverse annuity mortgage has become more popular in the last few years as many homeowners find themselves with a home that is fully paid for yet still wish to slowly pull equity out of that home.

Reverse Annuity Mortgages (RAM) are also known as home equity conversion mortgages (HECM), or reverse mortgage (RM). They are all defined as a mortgage where an older borrower (62 or older by law) has chosen to borrow against the equity that has been built up in the home. This money is generally paid out as a monthly payment, but it can under certain circumstances be paid out as a lump sum to the borrower.

This is, much as the name implies, the “reverse” of a normal mortgage agreement. In a normal mortgage agreement the loan value will decrease over time as the amount of equity you have in the home increases. In essence a reverse annuity mortgage reverses this process and allows you to be paid money for the equity that you already own in the home.

A Reverse Annuity Mortgage loan allows you to continue to live in and own your home while you receive a monthly payment that can help cover medical costs, food costs or general living expenses. An important thing to remember if you are considering a reverse mortgage is that the lender cannot seek a payment for anything other than the actual agreed upon value of the home. A “non-recourse” limit will protect other assets of the borrower and the borrowers’ heirs.

How to qualify for a Reverse Annuity Mortgage

In order to successfully apply and receive a Reverse Annuity Mortgage all the owners on the deed of the home must apply and sign all of the required paperwork. In order to qualify for a reverse mortgage the potential borrower must be over the age of 62, and own their home outright without any other encumbrances. These include any other mortgages, second mortgage or liens on the property.

What are the Normal Loan Amounts and Payments?

There are a number of variables that will effect the amount of money that you will be able to receive from your Reverse Mortgage. There are numerous different programs available from a number of lenders. Aside from the value of your equity in the home, which program and lender you choose will have the greatest effect on the amount you will receive.

The type of payments you elect to receive will also have a big effect on the ultimate pay-out amount. You will need to choose between a lump-sum payment or monthly distributions.

Your age at the time of completing the loan will also affect your payments. As a general rule the older you are the more money you will receive as part of the agreement.

The equity that is available in your home will have a large impact on the amount you will receive. Obviously the more equity that is in the home the more you will receive as part of the agreement.

There are three types of payment methods used in reverse annuity mortgages. They are:

  • A credit line that you may borrow against as needed
  • A single one-time payment
  • Standard monthly payments

What Types of Reverse Annuity Mortgages are there?

Just like conventional home loans there are many different types of reverse mortgage loans and programs offered by a number of companies and government agencies.

Private sector reverse mortgages are often the most expensive, but also come with fewer restrictions on how the money can be dispersed.
The federal government offers what are known as: Federally insured Home Equity Conversion Mortgages (HECM). This type of reverse annuity mortgage is typically the most inexpensive but at times more expansive than loans from local or State Governments.

State and local governments usually offer the least expensive Reverse Mortgage programs, however these programs often come with more restrictions and rules than the other types.

What are the Common Traits of a Reverse Mortgage?

Below is a short list of what to look for in reverse mortgages.

  • You should expect to pay closing costs and origination fees when you first setup the reverse mortgage. You may also have to pay insurance premiums or service charges. This is why it pays to check out a few programs to see which best fits your needs.
  • Remember that a reverse mortgage will take up some, or more than likely, all of the equity that you have built up in your property. Of course this will leave less to your inheritors.
  • They money that you receive from the reverse mortgage will not affect your Medicare or social security pay-outs, and the money is also not taxable.
  • Depending on the program that you decide to join, you will loan will either be on a fixed or variable interest rate.
  • The interest that you pay is not allowed to be deducted from your federal and state taxes until the entire mortgage has been paid down in full.

How will I repay my Reverse Mortgage?

There are a number of ways that you can repay the amount borrowed on your reverse annuity mortgage. At some time in the future the loan will have to be paid off in full. Below is a list of the ways that a reverse mortgage loan is usually repaid.

  • The property owner sells the property
  • The property owners leave the property
  • The property owners die

Also, it is important to keep in mind that there are other circumstances that will force a lender to take back the property including the following.

  • Property taxes are not paid by the property owner
  • The property owner lets the house fall into disrepair
  • The property owner does not keep proper insurance on the property

Often there are other specific conditions that can result in a default, please check with your individual program to make sure that you understand all of these rules.