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What is a Reverse Mortgage… in plain English

December 18th, 2011
     

money from home

Before you can learn what a reverse mortgage is, let us start by talking about what it is NOT. Reverse mortgages are not:

  • Just for the desperate
  • A trade for your home ownership
  • Free money from the government or any other type of entitlement program

In plain English, a reverse mortgage is nothing more than an equity loan secured by your home which is designed to defer the mortgage interest. It’s as simple as that.

The most common type of reverse mortgage is the HECM, which is the acronym for Home Equity Conversion Mortgage. This product was created by the Federal Housing Administration in 1989. While a traditional home mortgage requires the homeowner to make scheduled monthly payments over a specified term, (usually 30 years) the reverse mortgage interest is not due until the loan reaches maturity. As long as the homeowner still resides in their property and pays their property taxes and insurance they can take advantage of not making monthly payments on the money they borrowed.

You own your home

With a reverse mortgage you continue to own your home, paying your property taxes and homeowners insurance just as before. Like any mortgage, you will receive a monthly statement which will outline all interest charges and balance information. The only difference will be the absence of a coupon to return your monthly payment as no payment is necessary.

What are the qualifications?

Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current rates, and home value. (visit our calculator to estimate your loan) There is no income or credit score requirements as there are no monthly repayments. You must continue living in your home as your primary residence and continue to pay your properties taxes and insurance.

You’re in the driver’s seat

You can choose to make voluntary repayments of the mortgage interest in part or full without penalty. That’s right; you can make payments back on your reverse mortgage. You can also deduct that mortgage interest just as you would a traditional home loan and you can pay off the entire loan at any time with cash, refinancing or selling. Some believe that once you get a reverse mortgage the bank will eat all of the homes equity leaving your heirs with nothing but a mound of debt. Wrong. While no one can predict your homes appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took.

How is the loan repaid?

Unless repaid voluntarily, the reverse mortgage is not due until the last surviving borrower passes away or fails to occupy the property as their primary residence. The heirs will have ample time (up to 12 months) to complete a sale or refinance transaction to pay back the balance of the loan. If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. In the event that the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as a part of closing your reverse mortgage loan will cover your estate. The Lender will be reimbursed for any shortfall from the Mortgage Insurance fund.

Who is it for?

Anyone who has desires or needs that cannot be met with their current income levels. Reverse mortgages are a great tool to help you stay in the home you love or to simply enhance your retirement years.

Who is it NOT for?

Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges) it is not recommended for people who do not intend to live in their home for a reasonable amount of years to realize its benefits.

What about taxes?

Cash received by any mortgage is not considered income and will not be taxed.

Required counseling

The Federal Housing Administration wants you to fully understand the reverse mortgage and requires that all applicants receive independent 3rd party counseling by phone or in person. Once the counseling is completed you will receive a certificate of completion which is then signed and delivered to your lender of choice. (View a list of approved counselors)

Other considerations

Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs based” state or local assistance. This is not specific to a reverse mortgage but as to any excess funds that could change the qualifications on these types of programs. Like any mortgage it pays to shop around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitch “they’re all the same” or “we service our own loans”. The fact of the matter is ALL reverse mortgages carry the same safeguards, and there is only one federally insured HECM so don’t settle for less money or higher interest charges.

 

All Reverse Mortgage® is an Award-Winning HUD Approved Direct Lender. If you have a question about reverse mortgages give us a call Toll Free (800) 565-1722 or request our free guide and quote by clicking here »

 

PS – We also welcome and respond to comments below…

Recommended Reading…

Outside resources:

“What is a Reverse Mortgage in plain English” by Cliff Auerswald – Add me to your circles

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35 Responses to “What is a Reverse Mortgage… in plain English”

  1. Robin Adair Logan says:

    Does a reverse mortgage give you all the money your house qualifies for up front? Let’s say the house appraisal is $280,000 and the qualifying amount of the reverse mortgage is $175,000; does the home owner get a check for $175,000? Or is it parceled out in monthly payments?

  2. admin says:

    Hi Robin,

    That’s one of the great things about a reverse mortgage, there are a number of ways you can choose to take the money. If your benefit amount is $175,000 and you have no liens on the property, then the next choice you need to make is whether you want the fixed rate or the adjustable rate option. This is one thing that would determine how you would receive the funds.

    The fixed rate loan is a “closed-ended” instrument which means that you can only take one draw and that occurs at funding. So if you absolutely want the fixed rate loan, then you would have to take all the money as just a one-time payment. However, the adjustable rate loan has several options available for you to receive your funds. You can choose the same lump sum payment, you can choose to receive monthly payments, you can leave the money in a line of credit that you can access whenever you want or you could choose to take a combination of all the above (i.e. take $50,000 at close to pay off some debts and make home repairs, put $50,000 aside in a line of credit to be used whenever you want and then have the lender use the remaining $75,000 as monthly payments for life).

    The choice is yours and the funds can be taken based on your needs and desires and which program you choose. But you do have to remember that your choice will be limited to the lump-sum distribution if you decide you want just the fixed rate option.

  3. Elizabeth says:

    Once the family member dies does the Reverse Mortgage keep all contents in the house or can the remaining family members left remove the furniture out of the house etc before the Reverse Mortgage company claim the property back?

  4. admin says:

    Hi Elizabeth,

    The reverse mortgage company does not “own” the house at the time the borrower passes. The loan becomes due and payable and it is up to the borrower’s heirs to determine how they want to accomplish this. They can choose to sell the home and repay the loan, refinance the loan in their own name(s) or they can pay the loan off with other funds available to them. The lender does not own the property at this time and they do not own any personal property inside, it still belongs to the heirs of the borrower.

    Also, since the loan is a non-recourse loan, the lender can never seek repayment from any other assets to repay the loan. In other words, if the borrowers received all the funds before the prices of homes fell so dramatically in most areas of the country and lived there for many years without having to make payments, all the while accruing interest and now upon passing the property is not worth as much as is owed on the reverse mortgage, the heirs have the option to choose to either repay the obligation at 95% of the current appraised value or simply allow the lender to take the property to repay the obligation. Regardless of which option they choose, they still have the right to all the borrower’s personal belongings and, as stated, the lender cannot seek repayment from any other assets other than the property itself.

  5. Robert S. says:

    Great explanation in layman’s terms of what reverse mortgages are. I found this article helpful in my research and will be in contact after my counseling session is completed. Thanks -Bob

  6. Jimmy Dale says:

    Im kind of confused on the term *heirs* would that mean like your children or grandchildren or does that mean suriving spouse provided one passed before the other?

  7. Carol says:

    I thought a reverse mortage was when the bank gives you money for the value of your home, and you can live in your home, however when you die the bank takes your home and sells it, am I wrong?

  8. Mike Branson says:

    Heirs can be all of the above. If your surviving spouse is also on the reverse mortgage, they may be your heir for some other parts of your estate, but they are still the owner of the property. The reverse mortgage would remain intact so long as any of the original borrowers remain living in the property. For purposes of the reverse mortgage, a surviving spouse is not an “heir”, they are an original borrower/owner if they were on the title and loan when it was originally done.

  9. Mike Branson says:

    Hi Carol,

    Many people mistake reverse mortgages for a “transfer” of the home from the borrower to the bank. This is not the intent or the way the loan works. You always own your home, you are responsible for the payment of the taxes and insurance and for the maintenance on the home, just like with any other mortgage or home loan. The difference is that you make no monthly payments on the mortgage so instead of your balance going down as you make payments as is the case with a traditional or forward mortgage, the balance on a reverse mortgage goes up.

    There are a number of ways to receive your money and for a complete explanation of the program, I would suggest calling us (800) 565-1722 or read more at our FAQ section.

  10. Terry K. says:

    Thank you for this article. I have questions. My home is currently held in a LIVING REVOCABLE TRUST in which I am the trustee. I also have a will. I set up my affairs this way to avoid probate for my beneficiaries. Question #1: Can I obtain a reverse mortgage if I hold ownership of my home in this type of trust? I am retired and purchased a modest $200,000 home. I am sure it has lost some value in this down economy. I have $40,000 left to pay on my mortgage. It is my understanding that I can obtain a reverse mortgage with an existing mortgage. Question #2: Is there a general percentage of my mortgage that needs to be paid off to qualify as having “substantial equity” in my home and thus qualify for a reverse mortgage? Assuming my understanding is correct, Question #3: Can I obtain a reverse mortgage with an existing traditional mortgage on my home, or do I have to pay off my $40,000 mortgage with the funds from the reverse mortgage? Stated differently, what happens to my existing mortgage if I qualify for a reverse mortgage? Lastly, the article mentioned that my heirs/beneficiaries will have ample time (“up to 12 months”) to decide how to pay back the reverse mortgage loan. I have an adult child that resides with me. He has promised to live and care for me until my death. I do not want him thrown out of the house upon my death as a result of a mortgage of any kind (traditional or reverse) without some time for him to plan how to pay back the loan. Questions #4: During the ample time referenced in the article before a foreclosure is sought by the lender, are fees, charges and/or interest accuring that are added to the reverse mortgage loan repayment amount? Sorry for all the questions. I need to get clarity before calling.

  11. Mike Branson says:

    Hi Terry,

    Yes, a trust is acceptable. The lender will review the trust to be certain that it meets HUD guidelines but most do. The things they check for are in the borrower’s interests and most attorneys make certain they are included. Depending on the current value of the home, there is no problem with an existing mortgage. Your existing mortgage would have to be paid in full from the reverse mortgage proceeds.

    Terry, I’m glad you asked the question about the repayment. The lender and HUD work with families as long as they see that the family member is taking adequate steps to either pay off the mortgage or sell the home. This is very important when you have family who are still living in the property. HUD and lenders have seen circumstances in the past where remaining family members really didn’t want to leave the home and therefore, made no efforts to repay the mortgage or sell the home. In these cases, the properties may not have been listed in a timely manner, listed at prices above current market or when inspected, were not in “show condition” which meant that no buyer would probably be interested in purchasing the property the way it was being represented.

    If the family members are doing everything the lender or HUD could do to sell the home, then the lender and HUD have no desire to step in, incur the costs and labor to do the exact same things already being done. If the house is being priced competitively, and marketed well, nothing is gained by taking the home through foreclosure and having it off the market or falling into decay while that happens. Remember, foreclosure itself takes many months in most states so if there is nothing to be gained, the lender and HUD do not desire this route. Communication is key and as long as your heir works with the lender, they will continue to work with him unless it got to a point where after that 12 month period they felt a price reduction was in order and your heir refused. At that, if they deemed they needed to begin foreclosure, you still have the time frame needed to complete that process and as stated, this alone can take many months.

    He should have a plan going in as to what he wants to do when the time comes. If he plans to pay the loan off, then he will need to have financing available so he would need to know he can qualify for a mortgage of his own at the time (or a reverse mortgage if he is 62 or older and there is still sufficient equity in the home). His advance planning will be his biggest advantage so that he is not left unaware at the time when he has to start making decisions.

  12. omar artale says:

    I would like to know if I could do a reverse mortgage. My property has an actual value of $225,000 and my first and only mortgage is $225,000. Can I do a reverse mortgage without any equity in my house? Me and my wife are both 68 years old.

  13. Mike Branson says:

    Hello Omar,

    Due to the fact that reverse mortgages require no payments and as the interest accrues the balance rises, the loans do require you to have equity in the property when you begin the loan. We have a calculator here that will allow you to see for how much money you would quality for. Once you know how much you can get, you can approach your current lender to see if there are any options available for you. We have had some borrowers who were successful in getting lenders to accept a payment in full for less than the full balance due and as such, were able to replace their current loan with a reverse mortgage and live monthly payment-free. I do not know if this would work for you, but it couldn’t hurt to contact them.

  14. B. Green says:

    My husband will be 62 in June and I am 10 years younger than he is. If he qualifies for a reverse mortgage and then proceeds me in death, am I considered an heir or does the reverse mortgage continue. (I will be part of the mortgage after a quit claim deed) Do I have to wait until I am 62?

  15. Mike Branson says:

    The only way that you can get a reverse mortgage at this time is if he applies for the loan on his own and that would mean you would have to quit-claim off of the title since the minimum age for all borrowers on a reverse mortgage is 62. You would still be his heir and would still inherit the property, but this is something we do not recommend lightly.

    Because the loan becomes due and payable when the last borrower on the loan permanently leaves the home or passes, you would not be on title and not on the loan, so if you are not ready to move when this event occurs and you do not have other provisions in place beforehand to provide for this, it could create extreme hardships on you at the worst possible time. Some provisions borrowers have informed us of that worked for them is an insurance policy that paid the mortgage off when the older borrower passed; a second property that the borrowers owned that the spouse intended to occupy after the passing of the older borrower anyway; and also the plans that the younger spouse fully intended to move to another state to be with family if and when the older spouse was no longer living anyway. Absent a clear alternative such as one of these, it would be very sad for you as the spouse of a reverse mortgage borrower to be uprooted from your home at the worst possible time if that was not in the plans simply because the loan was now being called due and payable with the passing of the borrower and you did not have the means to refinance the loan in your own name at that time.

    We urge you to think very hard and long and to consult with financial planning professionals before removing a spouse from title just to complete the reverse mortgage request to be certain this is the correct action for your circumstances. You could obtain a reverse mortgage in both your names as soon as both borrowers are 62 years of age. I realize that is 10 years out for the two of you so I would counsel that you either make solid plans that would protect you if anything were to happen to your spouse before considering the reverse mortgage or waiting until you can both go on the loan.

    Feel free to call me at (800) 565-1722 and please read the following post “Reverse Mortgage with Spouse Under 62 Leaves Vulnerability”

  16. Mari says:

    I am wondering if wells fargo still continues to have reverse mortgage program if so I also have few other question (1)my father is 71 my mother is 61 she will be 62 next year my father is going to dialysis for his kidneys will this affect his medical? (2)he is retired my mother is his caregiver but both cant afford there mortgage they tried to modify there mortgage and were denied the first time they are trying once again can they still ask for reverse mortgage at this time?Also approximately how long will this take?

  17. Phil Levine says:

    I’m 69 years old and have owned my own small business for 20 years. I have no interest in retiring. But I do not as yet own my own home. I owned a co op in NYC for 12 years and sold it a while back to move in with my girlfriend. I am planning to move out in a few months and am considering buying a condo or apartment in NJ. I understand that there are times when a reverse mortgage can be attained by someone like me – who does not yet have a home. I have excellent credit and no debt.

  18. Mike Branson says:

    Hi Mari,

    You have several different issues here. The first answer is that Wells Fargo is no longer in the reverse mortgage business. Whether or not they ever have plans to return, only they can say. Secondly, all borrowers on a reverse mortgage must be a minimum of 62 years of age. Your mother cannot get a reverse mortgage until that time. Once she turns 62, the entire process can be completed in about 30 – 45 days from the date the lender receives all the signed applications back as long as your parents have completed their counseling before that time (no work can begin on the reverse mortgage until the borrowers have been counseled). There are things that can slow down this process such as clouds on title that must be resolved, appraisal or property issues, etc., but most loans are completed in a timely manner. Borrowers can speed up the process if that is their goal by having their counseling completed before their 62 birthday and be ready when the time comes (it does not pay to receive the counseling too early though as the certificate is only valid for 6 months).

  19. Mike Branson says:

    Hi Phil,

    The reverse mortgage for purchase program may be exactly what you need. If you can still qualify conventionally then you would not have to put as much money down, but then you would also have a monthly mortgage payment. If you do choose to go the route of the reverse mortgage, just remember that if you wish to buy a condominium, the project must be approved by HUD and many are not. In fact, many do not meet HUD’s requirements and not only are not approved, but CANNOT be approved.

    Getting a project approved can take many weeks and then you may find out that it does not meet the requirements and if that is the determination, you would not be able to even place a reverse mortgage within that project. Sellers do not like to wait for 6 – 8 weeks only to find out that your financing cannot be approved and most borrowers do not have a clause in their contract that allows them to get their deposit back after waiting so long to find out that the financing cannot be approved. Therefore, it’s important to know that it will work before you make the offer.

  20. Nicole says:

    My parents have been trying to do a home modification for the last year and a half. Are they eligible for a reverse mortgage even if they still owe on there property.

  21. Mike Branson says:

    Hi Nicole,

    The reverse mortgage can be done on properties with or without a current mortgage. The thing you have to remember is that all loans and liens currently on the property must be paid in full, either by the reverse mortgage or by the reverse mortgage and additional cash the borrowers have available to them if the proceeds of the reverse mortgage are not adequate to pay the current mortgage(s) in full. In any case, all current loans must be paid off so the best thing to do is to give us a call and determine the benefit amount to see if that will work with your lien situation. You can also check qualifications here at allrmc.com with our free calculator.

  22. Jack Dubray says:

    In order can make an inform decision, need to know how the financial institutions fund these type of transactions. Someone have to fund them because no one will keep the paper on the books without getting pay. Even though are guarantee by Feds, from were the monies come?

  23. Mike Branson says:

    Good Afternoon Jack,

    Reverse mortgages are just like most forward or traditional loans in this regard. Very few loans these days are made from a lenders’ own funds to remain outstanding for the term of the loan.

    Lenders fund loans with a warehouse line of credit and then sell that loan in the secondary market, reverse mortgages included. The loans are sold in securities which in turn replaces the lenders’ funds and allows them to remain liquid and to keep making loans. The securities are sold with the lender retaining the servicing rights since the investors who ultimately purchase the securities do not collect payments on forward loans, or make disbursements on reverse mortgages (in addition to all the other duties of a servicer that I won’t go into here). Without having an avenue to sell the loans into the secondary market, lenders would not have a flow of cash available to continue to keep making loans.

  24. Walter Galuska says:

    What does it mean when you say, Instead of the mortgage going down it will go up with a Reverse Mortgage?

  25. Mike Branson says:

    Hi Walter,

    We’re simply referring to the principal balance (the amount you owe) on the loan. With a reverse mortgage, the amount you owe increases over time since you make no payments and the interest accrues whereas on a typical standard or forward mortgage, you pay a monthly payment that pays the interest that accrues and usually a portion of the principal balance so that the balance goes down until the loan is paid in full within a set amortization period (30 years being the most common).

  26. Pete Buongiorno says:

    The loan amount on my home is higher that the value of the house. I am ready to move and leave the house. What do I have to do before I move? Do I call Wells Fargo and just give them the deed and is there any fees that I should be concerned about?
    Also does turning over the house, take time to do?

    Thank you
    Pete Buongiorno

  27. dave says:

    Reverse mortgages, or Home Equity Conversion Mortgages (HECM), are available to homeowners who are at least 62 years old. The loan taps your home’s equity, and the bank gives you the money either as a lump sum, a line of credit, or a monthly draw.

    You still pay for property taxes, insurance and the costs of maintaining the home. The lender can foreclose if you don’t. Also, because interest accrues over the life of the loan, your debt can ultimately exceed the value of your home.

    You don’t make monthly payments, but if you sell the house or move out for more than a year, the loan is due and the income stops. If the house is sold upon your death, proceeds go to pay the loan.

  28. Mike Branson says:

    Hi Pete,

    If you have the HUD HECM loan, the loan is a non-recourse loan and there would not be any fees to leave the home. You should contact the servicing agent and let them know that you plan to move out and that you want to work with them to make the transfer to them smooth and easy and I am sure they will work with you to do so. they would rather not take the house and would rather the house be sold, but if that can’t be done, it is much easier for them to work with you on obtaining a Deed than to go through a lengthy foreclosure. I wish you the best.

  29. Sally Keller says:

    My husband abd I would like to know if we should go live with my step dad, rent free, juat pay our bills. He has a nice 2 bedroom trailer ( for us-all new) and the main house which is brick, but sadly not kept up to par-as he was taking care of my Mom for 4 years as she was sick. They have a reverse morgage of now-going up each month- of about 170,000. The property is worth about 275,000. It is 110 acres, with a new barn cost $25,000. He cant just split it and give us some of the land and the trailer or it must go all as one piece? We want to live there but it seems like we may never pay off the reverse morgage and if we do, is the property now worth it. My step dad is 70. we are 58 and 56. Is it worthwhile to live there and save money until he passes they move or try to keep the place- confused really -many, many thanks

  30. Mike Branson says:

    Hi Sally,

    I can’t possibly advise you on whether or not you should go live with your father, that is a call you would have to make. I can tell you that whether you go live there or not, your dad will be able to live in the home for the rest of his life and then when he permanently leave the home (either from his death or if he had to go to an assisted living facility), the loan would then become due and payable. If you are his heirs, then you would have to option of keeping the home or selling the home at that time but if you choose to keep the property, you would have to be able to pay off the existing loan with either money you have available to you or be able to qualify for a new loan in your names at that time. Otherwise, you would have to sell the property at that time. You don’t have to “buy the property” from the lender if you are your dad’s heir, you would already own the property.

    You just need to keep these things in mind and plan accordingly whether you choose to move there or not if you are the heir and will be the owner of the property one day. It might make a difference as to how you prepare for ownership and loan payoff.

  31. steve says:

    I purchased my home with a via loan,so naturally the home is under my name.if I had a reverse mortgage on my home at the time I passed away,would my wife be treated as an heir and need to sell the home?

  32. Mike Branson says:

    Hi Steve,

    If you had a reverse mortgage with just you on title and on the loan and then you passed away, the loan would become due and payable at that time and if your wife was your heir, your wife would still own the property but she would have to secure financing in her name at that time or sell the home. This is why we do not recommend married couples leave one spouse off title to obtain a reverse mortgage. When a spouse passes, that is a difficult enough time in your life and you don’t need to have to start worrying about where you are going to live as well if you do not have other plans already in place.

  33. lydia G says:

    Happy Easter,
    question my sister and I are heirs of 2 acres of property with a home on it the home was given to both of us but the property was split one acre for her and one for me. the home sits on my acre I will soon be 62 she will soon be 70 will I be able to receive a RM on the home she has agreed to let it be done because I live in the home and plan to stay in it until death do us part

  34. lydia G says:

    death do us part meaning the house and me

  35. Mike Branson says:

    Hi Lydia,

    The short answer is probably yes but, I have to be honest with you in that the property and the transaction must meet HUD’s guidelines. I’m not sure what you mean by “split one acre for her and one for me”. Has the property gone through an official lot split so that there are two separate parcels now or is it one parcel with the two of you each owning a portion of the entire piece of land? There would be different steps involved depending on the circumstances.

    If there are two separate parcels where your parcel is completely separate with its own legal description containing only your acre of land, with just you on title and there are comparable sales in the area with similar sized lots then there should be no issues with the reverse mortgage in just your name on your parcel. The lot split could in no way adversely affect the marketability of the home (there could be no easements created that split the lot in half, the lot could not become land-locked, etc.) In this case you would be the only individual on title to your parcel though and would not require your sister’s approval so I suspect this is not the case based on your comments.

    If you mean by your sister is “allowing” you to do the reverse mortgage that the lot is staying intact as the two acre parcel, then there are a couple of other concerns. Firstly, if your sister is living with you (and it doesn’t sound like she is), she would also have to be on the loan and no additional title work other than for any other loan would need to be completed if you are both on title to the property now. If you are both on title now but your sister does not or will not be occupying the property, then she would have to deed her interest in the property to you. All owners of the property would have to be occupants of the home and on the loan to be eligible for the reverse mortgage. She could not remain on title and not occupy the property and still have the loan go through.

    Now I have to also give you a little more food for thought. I am not a tax attorney and I cannot tell from your email from which state you are writing, but I would also suggest that you contact an attorney who specializes in property transfers and taxation in the area before you determine how you are going to proceed. Some states allow a transfer and as long as the transfer value is marked 0 value on the Deed and that it is an interfamily transfer it will not trigger a taxable event. Some states are considering that a “gift” or secondary transfer after the inheritance and will levy a tax and possibly raise future taxes. Some states require that you verify heirship through affidavits before a transfer may occur. The time and cost of the attorney is extremely valuable considering it may save you from a very costly mistake if you don’t handle the transfer correctly.

    I wish you the best.

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