Re­verse Mort­gage: Facts & Ben­e­fits

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What is a Re­verse Mort­gage?

Re­verse mort­gages en­able house own­ers to ac­cess the money they have built up as eq­uity in their houses. Un­like an or­di­nary mort­gage, which in­volves pay­ments by the bor­rower to the lender, a re­verse mort­gage in­volves pay­ments by the lender to the bor­rower. It is an ar­range­ment whereby house own­ers get cash (usu­ally in the form of monthly pay­ments or a lump sum) in re­turn for a mort­gage on their house. This mort­gage is used as se­cu­rity against the loan. This is a strat­egy is ba­si­cally used by re­tired house own­ers who need to sup­ple­ment their in­come. A re­verse mort­gage is one way of tap­ping into the value of a house.

A bor­rower 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 house, as a line of credit, or a com­bi­na­tion of these. The most pop­u­lar op­tion – cho­sen by more than 60 per­cent of bor­row­ers – is the line of credit, which al­lows you to draw on the loan pro­ceeds at any time How Re­verse Mort­gages

Work A re­verse mort­gage is a loan: where the lender pays the bor­rower n a lump sum, a monthly ad­vance, a line of credit, or a com­bi­na­tion of all three. The bor­rower continues to live in his house. To qual­ify for a re­verse mort­gage the bor­rower must own the hoe. The amount he or she el­i­gi­ble to bor­row gen­er­ally is based on bor­rower’s age, the eq­uity in the house, and the in­ter­est rate the lender is charg­ing. Funds re­ceived from a re­verse mort­gage may be used for any pur­pose.

With a re­verse mort­gage, the bor­rower re­tains ti­tle to his house. The bor­rower is re­spon­si­ble for main­tain­ing the house and pay­ing all real es­tate taxes. Depend­ing on the plan selected, the re­verse mort­gage be­comes due with in­ter­est when the bor­rower moves, sell the house, reach the end of a pre-selected loan pe­riod, or die. When the bor­rower dies, the lender does not take ti­tle to his house, but his heirs must pay off the loan. Usu­ally, sell­ing the house or re­fi­nanc­ing the property re­pays the debt. Facts to Con­sider about Re

verse Mort­gages · Re­verse mort­gages are ris­ing-debt loans. The in­ter­est is added to the prin­ci­pal loan bal­ance each month, be­cause it is not paid on a cur­rent ba­sis. The amount bor­rower owes in­creases over time as the in­ter­est com­pounds. Some re­verse mort­gages have fixed rate in­ter­est; oth­ers have ad­justable rates that can change over the life­time of the loan.

· Re­verse mort­gages use up some or all the eq­uity in bor­rower’s house, leav­ing fewer as­sets for him and his heirs.

· There are three types of re­verse mort­gages: FHA-in­sured, lender-in­sured, and unin­sured and they vary ac­cord­ing to their costs and terms. ( Source: US Dept. of Hous­ing and Ur­ban De­vel­op­ment: www.hud.gov)

· Re­verse mort­gages typ­i­cally charge loan-orig­i­na­tion fees and clos­ing costs. In­sured plans charge in­sur­ance pre­mi­ums; some plans have mort­gage ser­vic­ing fees. Bor­rower may be able to fi­nance these costs if he wants to avoid pay­ing them in cash. But, if bor­rower fi­nances the costs, they will be added to his loan amount and he will pay in­ter­est on them.

· The bor­rower’s le­gal obli­ga­tion to re­pay the loan is limited by the value of the house at the time the loan is re­paid. This could in­clude any ap­pre­ci­a­tion in the value of the house af­ter the loan be­gins. Ben­e­fits of re­verse mort­gage

The Ben­e­fits of a Re­verse Mort­gage in­clude:

· Tax-free funds for as long as the bor­rower live in his house.

· No loan re­pay­ment for as long as the bor­rower live in his house

· No in­come, med­i­cal or credit re­quire­ments for ob­tain­ing re­verse mort­gage

· The bor­rower can re­tain own­er­ship of his house for life; this is guar­an­teed as long as he main­tains the house, and pays in­sur­ance and real es­tate taxes

· The bor­rower can choose a cash flow plan tai­lored to his needs

· There is no re­stric­tions on the man­ner in which the fund is used

Re­verse Mort­gage In In­dia

The con­cept of Re­verse Mort­gage is new to In­dia. Re­cently Na­tional Hous­ing Bank has come up with a plan to in­tro­duce re­verse mort­gage in In­dia. The fa­cil­ity will be made avail­able by banks to people aged 62 years and above. Na­tional Hous­ing Bank will do the re-fi­nanc­ing. The loan will be for up to 15 years. The value unlocked will be a func­tion of bor­rower’s age and value of the house. The in­ter­est will be based on the pre­vail­ing rate.

Na­tional Hous­ing Bank is cur­rently sort­ing out is­sues with CBDT that the fi­nance re­ceived by se­nior cit­i­zens is treated as a loan and not in­come. The bank is also try­ing to build in a mech­a­nism where the loan amount could flow be­yond 15 years. Rec­om­mended Pro­ce­dure To qual­ify for a re­verse mort­gage the bor­rower will have to ap­proach a hous­ing fi­nance com­pany (HFC) or a bank and ex- press his in­ter­est in pledg­ing his home for the re­verse mort­gage scheme. The HFC will asses the value of the house and, depend­ing on the age of bor­rower and the pre­vail­ing in­ter­est rate, the amount of loan payable to him will be de­cided upon.

The value of the house will be de­ter­mined by in­de­pen­dent val­u­a­tion through the gen­er­ally ac­cepted property val­u­a­tion method­ol­ogy in the in­dus­try. The loan amount will be fixed on the ba­sis of cur­rent value and not on pos­si­ble fu­ture ap­pre­ci­a­tion.

How­ever, the most crit­i­cal fac­tor in de­cid­ing the amount will be age. The older the bor­rower, the more are the chances of get­ting a higher value. This is be­cause the lender will have to typ­i­cally pro­vide the loan for a lesser num­ber of years. The in­ter­est rate at which the loan will be given will typ­i­cally be marginally higher than the pre­vail­ing in­ter­est rates as the lend­ing com­pany will re­ceive its money when the bor­rower dies. How­ever, cur­rently on the ba­sis of present ac­tu­ar­ial anal­y­sis, the loan to value ra­tio is fixed at 4560 per cent of the value of the property based on the age. NHB on Re­verse Mort­gage

Un­der the present rec­om­men­da­tions of the NHB, a bor­rower need to be 62 years of age and the ten­ure of the loan is fixed at 15 years. How­ever there have been rec­om­men­da­tions to lower the age to 60 as people usu­ally re­tire at that age. The pri­mary lenders shall how­ever have the dis­cre­tion to con­sider shorter/ longer ten­ure. In­case the bor­rower outlives the ten­ure of the loan, he will not be asked to move out of the house. In such a case pay­ments made to the bor­rower will stop af­ter 15 years, but the in­ter­est will keep ac­cu­mu­lat­ing till the ac­counts are fi­nally set­tled. There are also sug­ges­tions of adding in­sur­ance to re­verse mort­gage. The pre­mium for that will be de­ducted from the pay­ment made to the bor­rower. The cor­pus ac­cu­mu­lated at the end of 15 years will be used to fund the years that the bor­row­ers out­live the loan ten­ure. NHB has also rec­om­mended that a cer­tain por­tion from the pay­ments be parked in bank fixed de­posits to fund the years that bor­rower out­live the loan. The ac­counts will be set­tled by the HFC only af­ter bor­rower’s death or if he chooses to va­cate the property. The set­tle­ment of the out­stand­ing loan amount, along with the ac­cu­mu­lated in­ter­est, will be met by the pro­ceeds of the sale. In the event of bor­rower’s death, the spouse can con­tinue to oc- cupy the property un­til his/her demise, and he/she usu­ally made a co-bor­rower.

NHB is work­ing to­wards speedy in­tro­duc­tion of this con­cept. As the apex fi­nan­cial in­sti­tu­tion for hous­ing in the coun­try, NHB has de­signed the prod­uct on ready-to-deliver mode based on spe­cific needs of the as­set-rich but cash-poor se­nior cit­i­zens. It will en­deavor to pop­u­lar­ize re­verse mort­gage as one of an ar­ray of post-re­tire­ment fi­nanc­ing op­tions. NHB will not pro­vide re­tail loans but it can re­fi­nance re­verse mort­gage to banks and HFCs.

And in the event of a bor­rower seek­ing additional as­sur­ance that the bank/HFC will con­tinue to pro­vide pay­ments un­der re­verse mort­gage for the con­tracted pe­riod, NHB can guar­an­tee such obli­ga­tions.

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