Reverse Mortgages

Reverse Mortgages:
According to the Budget 2007, the National Housing Bank
(NHB) will introduce a novel product for senior
citizens : a “Reverse Mortgage” under which a senior
citizen who is the owner of a house can avail a monthly
stream of income against the mortgage of his/her house
while remaining the owner and occupying the house
throughout his/her lifetime, without repaying pr servicing
the loan.
What is a reverse mortgage ?
A reverse mortgage enables older home owners (senior
citizens) to convert part of the equity in their homes into
tax-free income without having to sell the home, give up
title, or take on a new monthly mortgage payment.
The reverse mortgage is aptly named because the
payment stream is “reversed.” Instead of making
monthly payments to a lender, as with a regular
mortgage, a lender makes payments to you.
In India the actual process of reverse mortgage has not
yet started . But based on general practices followed
in other countries, some common questions asked by
consumers about reverse mortgages are being given
below :
What are common payment plan options?
You can choose to receive the money from a reverse
mortgage
• all at once as a lump sum,
• fixed monthly payments either for a set term or for
as long as you live in the home,
• as a line of credit,
• or a combination of these.
The most popular option is the line of credit, which allows
you to draw on the loan proceeds at any time.
Does unused balance in the Line of Credit Option
has a growth feature? Does that mean I'm earning
interest?
No, you're not earning interest like you do with a savings
account. The growth factor takes into consideration that
your home has appreciated in value over the past 12
months and that you are one year older.
How much money will I get?
No matter which reverse mortgage product you choose,
the amount of funds you are eligible to receive depends
on your age (or the age of the youngest spouse in the
case of couples), appraised home value, current interest
rates, and the lending limit in your area. In general, the
older you are and the more valuable your home (and the
less you owe on your home), the more money you can
get.
Does my home qualify?
Eligible property types include single-family homes, 2-4
unit properties; own constructed homes and flats in
housing societies.
How can I use the proceeds from a Reverse
Mortgage?
The proceeds from a reverse mortgage can be used for
anything, whether its to supplement retirement income
to cover daily living expenses, repair or modify your
home, pay for health care, pay off existing debts, buy a
new car or take a "dream" vacation, cover property taxes
etc.
Are there any special requirements to get a reverse
mortgage?
As long as you own a home, and Senior Citizen, and have
enough equity in your home, you can get a reverse
mortgage. There are no special incomes or medical
requirements.
What if I have an existing mortgage?
You may qualify for a reverse mortgage even if you still
owe money on an existing mortgage. However, the
reverse mortgage must be in a first lien position, so any
existing indebtedness must be paid off. You can pay off
the existing mortgage with a reverse mortgage, money
from your savings, or assistance from a family member or
friend.
For example, let's say you owe Rs.10,00,000/- on an
existing mortgage. Based on your age, home value, and
interest rates, you qualify for Rs.15,00,000/- under the
reverse mortgage program. Under this scenario, you will
be able to pay off ALL the existing mortgage and still have
Rs.5,00,000/- left over to use as you wish.
If, however, you only qualify for Rs.8,00,000/- then you
would need to come up with Rs.2,00,000 from your own
savings to get the reverse mortgage. Even then, all the
money from the reverse mortgage will have been used to
pay off the existing mortgage. On the other hand, you
won't have a monthly mortgage payment anymore.
If you find yourself in a deficit situation where you don't
have enough money to pay off the existing mortgage, you
may use funds from a grant or gift from a family member
or friend to cover the gap, but you cannot incur a new
debt obligation (i.e., loan).
When do I pay back my loan?
No monthly payments are due on a reverse mortgage
while it is outstanding. The loan is repaid when you cease
to occupy your home as a principal residence, whether
you (the last remaining spouse, in cases of couples) pass
away, sell the home, or permanently move out. The
amount owed can never exceed the value of your home.
Furthermore, if the home is sold and the sales proceeds
exceed the amount owed on the reverse mortgage, the
excess money goes to you or your legal heir.
Under what circumstances should I not consider a
Reverse Mortgage?
Because of the upfront costs associated with a reverse
mortgage, if you intend to leave your home within 2-3
years, there may be other less expensive options to
consider, such as home equity loans. Also, if you want to
leave your home to your children, then you should
consider other options, because in many cases, the home
is sold to pay back a reverse mortgage.