Reversemortgages are categories among the special types of home equity loansgiven to homeowners. This types of equity loans have no monthlypayments, however, the borrowers, in this case, the customers arestill held responsible for the property taxes and the insurances.According to Jaffe et al. (n.d.), the reverse mortgage loan is rankedas the most well-developed type of loan products currently in themarket and within the mortgage industry.
Theorigin of the loan dates back to 1961 and since then there have beena number of changes that have taken place in order to transform thistype of loan to one that is beneficial to the customers. Some of theaspects of the loan that have undergone changes and adjustmentinclude the expansion of the additional innovative loan products,increase the awareness of the loan to the customers, the redefinitionof the options on the loan given to the seniors and improvement of anumber of practices.
Accordingto Reverse mortgage against 100% of housing equity taken out as anannuity (2013), the reversed mortgage loan first written to acustomer was the one written to Nellie Young in Portland by Haynes ofDeering Saving and Loan. Davidoff et al., (n.d.) explain that Haynesdesigned this type of loan so as to assist a widowed wife who was hishigh school football coach who at the moment was stay in her home andwas on the verge of losing her home. Later in the year 1969, theconcept was introduced in the Senate committee for a hearing.
Thebasic principal of the loan was to assist the homeowners in stayingin their homes and still have the luxury to enjoy the cash that wassaved in their home equity. In the year 1983, Senator John Heinzproposed in the congress meeting that the concept of the reversemortgage be back by an insurance concept within the Federal HousingAdministration. In the year 1989, the program kicked off as a smallpilot program and after years of showing potential, it was madepublic and permanent in 1998. The number of homeowners currentlyunder the program has increased incredibly since then and thecurrently insured reverse mortgage loans per year is over 70,000(Reverse mortgage against 100% of housing equity taken out as anannuity, 2013)
Theoriginal players in the program were the private companies who thenoffered reverse mortgages of different types which were not yetinsured by the government. This was in the 1980s and early 1990s aperiod when the program was being run by the government on a smallscale. Currently, only one lender offers a proprietary type ofreverse mortgage and statistics show that is quite a small portioncompared to the one being offered by the HECM.
Jaffeet al. (n.d.) explain that using the reverse mortgage, the seniorsare able to access equity that they have managed to build up in theirhomes over the years. Also, they are able to defer payments of theloan, when they sell, move out of their house or die. According toDavidoff et al., (n.d.), the reverse mortgage loan work in reverseunlike the traditional forward mortgage type of loans. According tothe traditional forward mortgage, the homeowners increase their homeequity while the loan balance decreases with time as they pay thelender. In the other cases, the reverse mortgage offers the customersdecrease in the home equity and their loan balance increases withtime. In addition, the homeowners receive a cash payment from thelender and after a period of time, there is an increase in theinterest on the loan.
Whodoes reverse mortgages service?
Thosewho are served by the reverse mortgages include homeowners of age 62years and above. In addition, the clients must own their own homes,have mortgage balances which are very low such that they can be paidoff at closing when the homeowner proceeds from the reverse loanmortgage. In addition, the client is supposed to have the ability tomake payments on the current property charges which are inclusive ofinsurances and the taxes. Finally, the client must live in the home.According to Jaffe et al. (n.d.), the home must be a single-familyhome or a two to four-unit home have one of the units being used bythe client. In most cases, there are homes such that their approvalto qualify for the services are determined by the HUD-approvedcondominium and are as per the FHA requirements.
Whatare the benefits to the bank?
Oneof the functions of the bank is to collect money and invest it in oneor two business so as to generate profits. In line with this, thebanks have a longer period of time to invest the money saved in forof the mortgage loans and carry out business investment with itmaking huge amounts of profit. The amount generated in form ofprofits can then be shared between the banks and the clients in sucha case the reverse mortgage agency and homeowners. The bank alsooffers the agencies and the clients loans since they have assetswhich they can use as securities and intern accumulated profits outof the interest they get from the loans (Davidoff et al., n.d.).
Whatare the genuine benefits to the elderly on a reverse mortgage vs. ahome equity line of credit?
HomeEquity Lines of Credit (HELOCs)
Thehome equity line of credit also revolves around the equity of thehomes. In this case, the borrower is allowed to draw a line up tosome level that has been approved in the lender`s contract. Caysieret al., (n.d.) stated that HELOCs applied to a group of people whointend to leverage their home so as to acquire some cash and make hisor her bill payments. It also favors those who intend to getadditional money to settle home repairs needs, major medical bill andthe borrower who have the potential to make the monthly payments.
Accordingto Davidoff et al., (n.d.), the HELOCs comes with a number ofadvantages which include low costing costs and no fees are include inthe in the processing of the loan. In addition, the age of the clientdoes not matter in this case and the interest rates of this loan arelower than that of the reverse mortgage loan. They further state thatthe value of the house is higher compared to the loan balance. Inthis case, when the home is sold or passed to the children, the homewill still have an equity value at that moment.
Thedisadvantage of the HELOCs includes the fact that the borrower musthave a good to excellent credit. As per Caysier et al., (n.d.), thedebt to income ratio must be very low. The other disadvantageincludes the fact that the borrower is required by the lender to makepayments monthly wise so as to repay the home loan. In the case wherethe payment is not made, the lender will end up foreclosing the dealand the borrower is at risk to lose his home. Worst of all, there isno non-recourse protection in the scenario where the lenderforecloses the deal.
Inreverse mortgages, the same principle of allowing borrower to changehis or her homer equity into cash works just like in the HELOCs
HowReverse Mortgages Work
Thedifference in terms of the working principle of the reverse to thatof the HELCOs included payment of the borrower by the lender insteadof the opposite as in the HELOCs. Currently, in the market, the majorplayers in reverse mortgages are the FHA’s Home Equity ConversionMortgages (HECM). The loans are given out in the form of a lump sum,line of credit, or monthly amount. To measure the amount of moneypaid to the borrower, the value of equity of the home is assessed. Inthe case of the equity being paid, the value decreases with time andthe other hand the loan balance increases. The loan that is paid backis only done when the borrow moves out of the home, dies or intendsto sell the house. The home is then sold so as to pay the loan inanother case the lender forecloses so as to be able to satisfy thedebt they have.
Theadvantages of these reverse mortgage approached apart from payingtheir clients monthly, the income is tax-free and the mortgage isnonrecourse. According to Caysier et al., (n.d.), there is no casewhere the lender comes after the client so as to settle a deficiencyjudgment case. However, the disadvantages include the client has tomake payments continuously for the taxes and the insurance and takecare of the home always. In the scenario, this doesn’t happen, theagency is at the position to foreclose the contract.
Accordingto Davidoff et al., (n.d.), the whole reverse mortgage concept iscomplicated and in the case where the borrower suffers from anillness and is forced to leave his home when already he or she hastaken the reverse mortgage, the agency can foreclose the deal.Nakajima et al., (2017), claim that the reserve mortgage can becategories as an expensive mortgage technique due to the cost incurduring the closing, the servicing fees, the mortgage insurance andother fees tied to it. Caysier (n.d.) on the other hand, states thatthe case where the home of the client doesn’t appreciate at all orhas very little appreciation rate, the amount that will be passed tothe beneficiaries is likely to be very small when it is taken out ofthe mortgage.
Isthe reverse mortgage still a sound strategy? Or simply a backup plan?
Consideringboth reverse and HELOC, the both have the potential to turn the homeof the clients into cash. However, the difference lies in themechanism of disbursement, the age requirements, the equityrequirements, credit and income requirements and the advantage to theclient in terms of taxes and insurance. According to Caysier (n.d.),the reversed mortgage applies best when one intends to have along-term source of income, has no intention to keep his or her homeamong his or her possessions. In addition, the loan covers thespouses for the cases when the client is married.
Otheroptions like the HELOCs, work best for those who intend to get ashort-term cash, have the desire to maintain the ownership of theirhomes and have the potential to make the required monthly payments.Considering the reverse mortgage and the other related services suchas the HELOCs, both have a number of advantages and disadvantagesdepending on the needs of the client. However, it comes out clearthat the reverse mortgage is an option to be considered as a backupplan than a current plan. Therefore, RM is not a safety net for theseniors who are unprepared for retirement rather viable as part oflong-term estate planning.
Whatare the safeties to protect both banks and the retirees?
Amongthe safeties put in place to protect the parties that engage with thereverse mortgage include the right of rescission. In this case, theclient has at least up to three business day after he or she have toclose the deal to cancel the deal depending on any valuable reasons.In this case, the client does not suffer any penalties. According toDavidoff et al., (n.d.), the customer has the right to cancel thecontract. In order to carry out this, he or she is required to send awritten document either by email or letter form to the reversemortgage company. When the reasons are eligible, the cancellation isfollowed by a twenty-day deadline for the reverse mortgage company torepay the client all the cost he or she incurred in the transactionsof the contract.
Inthe scenarios where there are potential reports of scam or anyparties involved in the contract is breaking the state laws, theclient has the right to report the incident to relevant offices suchas the Federal Trade commission, the state banking regulatory agencyor the state attorney General office. Where the client lives in thehome for a long period of time such that they continue to borrow withrespect to the value of their home and the value of the home, thegovernment has put in place a mechanism to protect the client.
Whatmore can be done to Reverse Mortgage programs to benefit elders?
Thereverse mortgage program has been a great help to the elderly people,those who do not have income or saving to pay for their needs andbills such as the personal care or modification in their homes tolive a better life. There are several categories that the elders aregrouped within the reverse mortgage program. They include
Singleseniors in fair health
Inthis case, the reverse mortgage works for them perfectly as they endup needing no medical care. In such a case the end up livingindependently in their homes. The money that comes from the mortgagesthey can intern uses them to get themselves a long-term insurance andmake improvement in their homes making them have a potential to agefor a longer time in their homes (Caysier et al., n.d.).
SingleSeniors in Need of Care
Forthis case, the family should be in a position to provide sufficientcare to the elderly person such that the money from the reversemortgage can be used to pay bills such as those of the adult care orthe in-home care. In the case where the loan program is the onlything that the elderly Is going to be the only source of income, heor she depends on then the loan program isn’t the best option. Someof the principals governing the contract include the house to be soldin the scenarios where the client doesn’t report to his or her homewithin a period of twelve months. In such a case, the client ifelderly and in need of care proceeding up to more than 12 monthsoutside the home, options of renting the home becomes a betteroption.
Othercategories of the seniors include the married seniors in fair health,married seniors with one spouse in need of care and the marriedseniors with both spouses in need of care
Inall the above classes, there are a number of ways that the reversemortgage can be implemented to ensure that the elders benefit fromit. Among them include the use of the reverse mortgage to pay thefamily member place in charge of taking care of the elderly.Picturing this at some point might seem odd such that it can be viewas the caretaker taking advantage of the elderly since the work canbe done free of charge. However, according to Davidoff et al.,(n.d.), there are a number of good reasons that can be found in suchan approach such that the caregiver earns a living by providing careand in such as a case, this is a compensation rather than takingadvantage.
Inaddition, there is case where the elderly prefer family members toother people to provide the care to them. The time consumed by thecaregiver needs to be appreciated and the fact that he or she doesn’tmake a living, the payment can be a source of income. Therefore, inthe event of planning for the future of the medical care of theelderly, there is the need for proper medical care which is bestoffered by the family member than any other person. This removes thecost that might have been incurred by taking the elderly to a nursinghome which is even more expensive. Secondly, the elderly will bestaying at the home then abiding by the requirement of the loancontract (Nakajima et al., 2017).
Thereare a number of possible alternatives to the reverse mortgages suchas the HELOC in the case of homeowners who are in need of financialresources within a short period of time. Other areas of the country,the property values of the homes are quite high such that is a betteroption to go for alternatives such as Rex Agreement and Equity Key.In can be noted that there are also other alternatives to elderlyloans which can take care of their short needs. However, in thisscenario, the best alternative to the seniors is the reverse mortgageapproach since it has a number of long-term benefits and betterinterest rates. Close to it is the HELOC but for the cases where theelderly is unable to make periodic payments for the HELOC, the bestalternative in place is the reverse mortgage.
Caysier,John, Michael Plane, Thomas Bysshopp, Thomas Drew, Anthony Palmer,William Chetwyn, Leonard Robertson, John Reynold, William Johnson,and Martin Drew. Mortgage.N.p.: n.p., n.d. Print.
Davidoff,Thomas. "Reverse Mortgage Demographics and CollateralPerformance." SSRNElectronic Journal(n.d.): n. pag. Web.
Jaffe,Austin J. "Reverse-Equity Mortgage." TheEncyclopedia of Housing(n.d.): n. pag. Web.
Nakajima,Makoto, and Irina A. Telyukova. "Reverse Mortgage Loans: AQuantitative Analysis." TheJournal of Finance72.2 (2017): 911-50. Web.
"Reversemortgage against 100% of housing equity taken out as an annuity."(2013): n. pag. Web.