Wealth Logic Solutions

A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs. With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home or “age in place” and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first most widely available reverse mortgage in the United States was the federally insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.

Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.

This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.

The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.

In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.

From Realty Times issue dated April 24, 2007

Poor mortgage choices, bad credit management, a lack of financial literacy and weak savings habits are among some of the underlying themes in the distressed housing market.

Hard-sell come-ons, predatory lending, fraud, scams and market practices that created over-inflated home prices are responsible, in part, for rising foreclosures, reduced equity growth and a general malaise in the housing market, but consumers without a clue also get some of the blame.

… “More American consumers are in need of financial education than ever before. More expansive and creative financial products have been a blessing to many, but have created real problems and barriers for others.”

A recent NFCC survey, conducted by Princeton Survey Research Associates International, reaffirms the need for financial and credit education and information, particularly among young adults and some ethnic groups.

The survey reveals consumers universally ignore the fundamentals of sound financial management, such as budgeting and tracking expenses, ordering free credit reports, and managing credit card debt.

Consumers who know they need help and want it often don’t know where to find it.

When Princeton telephone-interviewed 1,003 consumers nationwide from March 20 and March 28, 2007, it discovered:

* Only a minority (39%) keep close track of expenses, and this does not vary by gender, age or income. — You don’t know where your money goes if you don’t track expenditures. If you know where your money goes, you are more likely to be able to stop unnecessary spending and save more.

* Less than half of Americans have ordered their credit report, despite the fact that it is free (actually, you are entitled to three credit reports, one from each of the three big credit reporting agencies every year.) — Getting a look at your free credit report, before you apply for credit, should be a no-brainer. If there are errors or black marks that affect your application or how much money you can borrow, you won’t know until it’s too late if you don’t have a recent copy of your credit report. Obtaining your credit report gives you time to correct errors or improve your credit standing before you apply for credit. It will also let you know if someone has commandeered your identity and is using it to steal credit.

* Nearly four in ten Americans (38%) do not pay their credit cards in full each month. Given the high cost of credit card interest, that could set the stage for prolonged indebtedness, severe financial strain, even financial disaster.

* Two-thirds of Americans say they learned a great deal or fair amount about financial issues, such as managing money, balancing a checkbook and building their savings, at home versus in school. — Financial counseling professionals say family members can be sources of good advice and smart practices, but not always. They may not be fully aware of changing economic or market conditions that could affect financial behavior and your need to make adjustments in your financial habits.

* A Harris Poll revealed older consumers would be more aggressive about their financial habits if they had to do it over again.

* Younger consumers, African-American and Hispanic consumers are most interested in financial education and advice.

* One-third of all respondents do not know where to turn for financial advice. Wealth Logic Solutions through the Foundation for Personal Financial Education is available for free financial education workshops in your organization. Contact us today!

Wealth Logic Solutions 773.769.5200

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FROM The Chicago Tribune May 6, 2007

Long criticized as too upbeat, Realtors’ departing economist now sees recession.

… “We’re in a real estate recession,” said David Lereah, chief economist for the National Association of Realtors, … “I’m projecting the first (nationwide) price drop since the Great Depression … We’re going to have negative home prices in 2007.”

Economists generally agree that the (real estate) slide did begin in fall 2005. That year, home sales exceeded $7 million and have since tapered to a current rate of $6.1 million. Though that’s still historically solid, the inventory of homes for sale has climbed to a record 30-month supply.

Lereah said the market overheated primarily because of lax lending practices and record numbers of speculators who bought houses at inflated prices to flip for profit. … making zero down payments with no documentation, that’s just irresponsible. “But the Realtor, the lender, the title attorney, they all got wrapped up in the frenetic pace of the boom.”

… “We strayed from (economic) fundamentals, and we’re paying for it. It’s not an all-out bust, not a crash in real estate, but it is a recession. This is going to cleanse the markets and in the long term this is what we have needed.” … Nonetheless, he said housing’s long- term prospects are good. …”I think it’s the best investment anybody can make.”