Reverse (Annuity) Mortgage

Examples

Scenario 1: Supplementing Retirement Income
- Homeowner: Mary, age 72
- Home Status: Owned free of any liens
- Payouts: $250 per month from the Reverse Mortgage
- Purpose: To supplement her insufficient pension income.
- Repayment: Upon Mary’s passing or sale of her home, the home is sold and the loan is settled.
Scenario 2: Long-Term Care Funding
- Homeowner: Ted, age 75
- Home Status: Owned with substantial equity
- Payouts: A lump-sum payment of $50,000 from the Reverse Mortgage
- Purpose: To fund long-term care expenses.
- Repayment: Ted’s home is sold when he moves into a long-term care facility, and the loan balance is paid off.

Frequently Asked Questions (FAQs)

Q: What is a Reverse (Annuity) Mortgage?

A: It’s a mortgage where the homeowner receives periodic payments from the lender, which are paid back when the homeowner sells the property or passes away.

Q: Who typically qualifies for a Reverse Mortgage?

A: Typically, homeowners aged 62 or older with substantial home equity.

Q: Do reverse mortgage borrowers retain homeownership?

A: Yes, they retain ownership of the home and remain responsible for property taxes, insurance, and maintenance.

Q: What happens if the loan balance exceeds the home’s value at sale?

A: Reverse mortgages are typically nonrecourse loans, meaning the lender cannot claim more than the home’s value at sale.

Q: Are reverse mortgage payments taxable?

A: No, reverse mortgage payments are generally considered loan advances and not taxable income.

Q: Can a reverse mortgage affect social security or Medicare benefits?

A: Generally, reverse mortgage payments do not affect Social Security or Medicare benefits.

Home Equity: The market value of a homeowner’s unencumbered interest in their real property.
Negative Amortization: When loan payments do not cover the interest due, causing the outstanding loan balance to increase over time.
Nonrecourse Loan: A loan secured by collateral, typically property, where the lender’s claim is limited to the collateral in case of default.
Pension: A fixed amount paid at regular intervals to a person (usually retired) eligible for the benefit.

Online Resources

References

“Reverse Mortgages for Dummies” by Sarah Glendon Lyons and Tom Kelly.
“The New Reverse Mortgage Formula” by Tom Deutsch.
“Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement” by Wade Pfau.

Suggested Books for Further Studies

“Reverse Mortgages: How They Work and How Seniors Can Use Them to Create Security and Peace of Mind” by Peter H. Bell.
“A Survivor’s Guide to Reverse Mortgages” by R. Anderson.
“Your Key to Senior Finances: Unlocking the Benefits of Reverse Mortgages” by Christina Wolf.

Real Estate Basics: Reverse (Annuity) Mortgage Fundamentals Quiz

### Who is the primary target demographic for a reverse mortgage? - [ ] Young couples - [x] Elderly homeowners - [ ] First-time homebuyers - [ ] Real estate investors > **Explanation:** Reverse mortgages are particularly designed for elderly homeowners who have substantial equity in their homes. ### For what purpose is a reverse mortgage typically used? - [ ] Investment in new properties - [x] Supplement current living expenses and healthcare costs - [ ] Starting a new business - [ ] Paying off automobile loans > **Explanation:** Reverse mortgages are often utilized to supplement current living expenses and cover healthcare costs for retirees. ### What distinguishes a reverse mortgage from a traditional mortgage? - [ ] Homeowners make monthly mortgage payments. - [ ] Interest rates are higher. - [ ] Homeowners receive payments from the lender. - [x] Homeowners receive payments from the lender and do not make traditional mortgage payments. > **Explanation:** In a reverse mortgage, the lender periodically pays the homeowner, roughly the opposite of how a traditional mortgage functions. ### What is a key feature of a nonrecourse loan? - [ ] Total debt forgiveness - [x] The lender cannot claim more than the collateral value - [ ] The homeowner can borrow extra money without refinancing - [ ] Immediate repayment of the full loan balance upon default > **Explanation:** A nonrecourse loan is secured by collateral; if the homeowner defaults, the lender cannot claim more than the value of the collateral. ### How is a reverse mortgage repaid? - [ ] Through monthly payments from the homeowner. - [ ] With regular employment income. - [ ] Repaid upon death or sale of the home. - [ ] By refinancing other properties. > **Explanation:** The reverse mortgage is typically repaid from the proceeds from the future sale of the home or upon the death of the homeowner. ### Can a homeowner with a reverse mortgage still live in their home? - [x] Yes, they can continue to live in their home. - [ ] No, they must vacate upon receiving payments. - [ ] Yes, but they need to lease it from the bank. - [ ] No, immediately after the mortgage is completed. > **Explanation:** Homeowners can continue living in their homes under a reverse mortgage arrangement, provided they meet conditions such as maintaining the property and paying taxes. ### What type of loan is a reverse mortgage described as? - [x] Nonrecourse loan - [ ] Fully amortizing loan - [ ] Adjustable rate mortgage - [ ] Subprime mortgage > **Explanation:** A reverse mortgage is a nonrecourse loan, meaning that if the loan balance exceeds the home value, the lender cannot pursue other assets from the borrower or their heirs. ### What is the minimum age requirement for most reverse mortgages? - [ ] 18 years - [ ] 55 years - [x] 62 years - [ ] 75 years > **Explanation:** Most reverse mortgage programs require borrowers to be at least 62 years old. ### What financial element regularly makes the loan balance increase in a reverse mortgage? - [ ] Periodic loan refinancing - [ ] Decreasing property taxes - [x] Interest accumulation and received payments - [ ] Dividends from the property > **Explanation:** The loan balance increases due to interest accumulation and the borrower receiving periodic payments. ### Why don't reverse mortgage payments affect Social Security or Medicare benefits? - [ ] The government doesn't track reverse mortgage transactions. - [x] They are considered loan advances and not taxable income. - [ ] These programs operate independently of income status. - [ ] Payments are too low to impact benefits. > **Explanation:** Reverse mortgage payments are considered loan advances, not taxable income, and thus do not affect Social Security or Medicare benefits.