Reverse Mortgages Part One - Senior Citizen Cash Flow Options

Reverse mortgages allows seniors to use part of the equity in their home to supplement their income tax free. The general requirements for a reverse mortgage is that you are 62 years old or older and have enough equity in your home. There are no income or medical requirements to qualify for a reverse mortgage. One of the main advantages of a reverse mortgage is that you will not have to make a monthly mortgage payment. Instead this type of mortgage is used as an additional income stream. As a matter of fact you will have several payment options. You can either choose to receive a lump sum payment, a line of credit that you draw from when you want, or a fixed monthly payment for a predetermined term or as long as you live in your home.

There are many type of reverse mortgages available for senior citizens. They typically fall in three categories. FHA-Insured, Lender-Insured, or Uninsured. Selecting the appropriate product depends about your needs and qualifications. This article will focus on the Home Equity Conversion Mortgage(HECMS). This type of reverse mortgage is the most common.

Benefits of a Reverse Mortgage

A reverse mortgage can be extremely helpful for senior citizens with limited income resources. It is a way to effectively use the equity in your home as a benefit for you. Many seniors work all their lives to pay off their home and never receive the benefit of the equity lying dormant in their homes. This type of mortgage allows you to maximize the use of the equity you've worked so hard to build. Below is a list of benefits that a reverse mortgage can offer.

· If you are receiving social security income, obtaining a reverse mortgage will not affect your eligibility for your social security benefits. This allows you to have an additional income stream instead of losing one income resource to get another.

· Even though you are getting a loan against the equity in your home you will not incur additional expenses. Instead you will gain an additional stream of income.

· You can stay in your home and not be forced to sell or refinance if the loan balance exceeds the value of your home.

Home Equity Conversion Mortgages(HECMs)

This is the most popular type of reverse mortgage. It falls in the category of FHA-Insured reverse mortgages. This type of reverse mortgage is backed by the U.S. Department of Housing and Urban Development(HUD). In order to qualify for a HECM the following factors are evaluated:

1. Your age

2. The appraised value of the home

3. Current interest rate

4. Location of your home

Generally speaking the more equity you have in your home and the older you are, the more you will qualify for. Due to the fact that this is a FHA-Insured loan there are also restrictions on the amount of the loan. Each county has a maximum loan amount threshold. This is determined by statistical information gathered by HUD which would include but not limited to size of county, average value of homes in the area, and average income in the area.

Another key point to note is that if you choose to select this type of loan you would be required to pay an upfront mortgage insurance premium(UFMIP). This is typical of any FHA-Insured loan. This premium is paid upfront as part of your closing costs. It is typically 2% of the value of your home or the maximum loan amount of your area whichever is less. Assuming that the value of your home is $300,000 and the maximum loan amount for your area is $275,000 then you would have to pay $5500 as part of your closing costs. In addition to the UFMIP a lender can also charge up to 2% as an origination fee. So using the before mentioned example your total closing costs could be as $11,0000. Keep in mind that this is for illustration purposes only and your closing costs could be a lot less.

UFMIP is an insurance that you pay to insure 2 primary things. The first being that FHA will ensure that you always have access to your loan funds despite the status of the company servicing your loan. The second being that FHA will ensure that you never owe more that what your home is worth.

As stated above the HECM is the most popular type of reverse mortgage. HECMs also allows you to receive more of the equity in your home compared to some of the other reverse mortgage options. I will explore the other options in greater detail in another article entitled "Reverse Mortgages Part Two - Senior Citizen Cash Flow Option" .