Reverse annuity mortgage
Reverse annuity mortgage or the RAM as we would hereafter call it in short, usually functions to benefit the elderly people. This is especially true for those who have a property as in, a house, but run short of cash. A house is too valuable an asset to lose. Therefore, it is always better to consult an attorney or other family members and friends to lessen the financial risk, if any, before availing this plan. Knowing your rights and responsibilities as a borrower in fact, is a must.
HOW DOES THE RAM WORK
RAM is a kind of home equity loan. Here, you are allowed to convert some of your home-equity into cash, while still retaining the ownership over your house. In this scheme, your lender pays you every month. You are also not required to repay the principal, the servicing fees and the interest in most of the RAM s (sometimes also designated RMs) as long as you live in your own house. The money you get could be used towards expenses such as taxes, insurance, maintenance etc. AVAIliNG THE BENEFITS OF RAMYou can avail the benefits of Reverse annuity mortgage only if you own a house. The lender may choose to pay you the amount any way he wants to. The amount that you could borrow depends on your age, your home-equity, and finally the rate of interest that is being charged by your lender.With an RM and your home title to your name, you would be held responsible for the repairs, the taxes etc. Generally upon the owners death, the lender does not take the home-title, but the subsequent heirs are required to repay the loans.
RAM SOME COMMON FEATURES
The following are some of the common features of this scheme.In RM, the interest is not paid every month. It is added to the principal loan amount. This simply means that the total amount of interest increases with time because the interest compounds. Generally 3 plans are seen in RM - FHA-insured, lender-insured, and the uninsured. You may be charged with insurance premiums in case of insured plans and sometimes also the mortgage servicing charges. The borrower may actually not be required to pay for these charges but they will be added to the total loan amount. One of the biggest drawbacks of RM is that some or all of the equity of your property is used up. This could lead to fewer assets being left behind for you and your heir/s.A loan advance can also be requested at the closing. This amount can actually be larger than the other payments.RM loans and advances cannot be taxed. Moreover, they do not affect the social security, medicare benefits etc. RM advances also do not affect the supplemental security income, provided you spend them the same month they are got. Sometimes, your plan could involve a fixed rate of interest and the other times, rates could be adjusted based on prevailing financial market.Generally, the interests on RMs are not deductible for income tax reasons and this holds good until the entire loan or a part of the loan is paid off.
DIFFERENCES IN RAM
Generally, when we talk about RAM, we talk about one of the 3 types, i.e. either the FHA-insured, or lender-insured, or the uninsured type. The 3 types differ from one another based on the costs and the terms. Although the first two types may look quite similar in plan and package, differences do exist between them.
TYPE 1 FHA-insuredWhen you opt for this type of RM, you could be offered several payment options. You could also get the loan advance on a monthly basis as long as you live in your own home, etc. Here, it becomes essential to pay the closing costs as well. You may also need mortgage premium insurance and some even charge the servicing fees. Interest rates charged are generally at an adjustable rate over the balance amount that needs to be paid. If there is a change in the rate of interest, it does not affect the monthly payment, rather affects how fast the loan balance increases over a given period of time. If you go for an FH-insured RM permit, then you can avail changes in payment options at a low cost. You are also provided a sort of protection ensuring that the loan advances are given to you even if your lender defaults. On the flip side, such RMs could provide smaller loan amounts than the lender insured plans. In comparison with the uninsured plans, the FHA loans could also cost a lot more.
TYPE 2 Lender-insuredSuch Reverse Annuity Mortgage loans could be greater than the FHA-insured loans. Another feature of this type of RM is that, it could allow you to mortgage less than the full value of your home, thereby letting you preserve your home equity.Sometimes, in lender-insured plans, you can also come across schemes where payment is made on a monthly basis even when you move or sell your home. But it is of utmost importance to check the financial security of the company offering such options. In case the company does not have a sound financial background or is a newly formed one, then it is better to think and re-think before seeking help from there. It should also be noted that such annuity payments that are made to you could be taxable, and may also affect your eligibility to avail the Supplemental Security Income and Medicaid.
TYPE 3 UninsuredIn an uninsured Reverse annuity mortgage, monthly loan advances are got only up to a certain time frame. Actually when it is time for the loan balance to be paid up, the loan advances do stop. The rate of interest in this type is usually fixed and you do not need a mortgage insurance premium.The age limit for availing a Reverse annuity mortgage could be 62+, or 65+ or 70+ depending on the lender you select. Other restrictions also apply. So check up with your lender or an attorney.
Other Articles
