Lingering expenses from college tuition, car payments,
stock market decline, rising insurance premiums, medical expenses,
and smaller investment returns have forced many seniors to
take out new mortgages to meet financial demands.
A conventional mortgage is one option, yet a reverse mortgage
is another way for "house rich, cash poor" homeowners
to stay in their homes with a tax-free income for life.
It has been a godsend for people like Margaret P., a 73-year-old
widow in declining health and rising debt. Her home needed
a new roof, furnace repairs, and work on the old foundation.
Margaret's Social Security was stretched to the limit and
she feared losing her home.
With guidance from a senior advocate and her bank, she
turned the equity from her home into income. She was able
to stay in her home, pay for needed repairs, and maintain
her independence and a new-found peace of mind. While a
reverse mortgage isn't for everyone, it was the right solution
for Margaret. How does it work?
With a reverse mortgage, homeowners age 62 or older
borrow against the equity in their homes (or condominiums)
without having to sell or make monthly payments. What they
borrow provides an income until they die, sell, or move
permanently from the home. Traditional mortgages are based
on "falling debt, rising equity," meaning as you
make payments your debt goes down and equity goes up. A
reverse mortgage is a mirror image, working instead on "rising
debt, falling equity." Traditional loans turn debt
into equity, while reverse mortgages turn equity into debt.
Typically, when the last surviving borrower dies the heirs
repay the loan through sale of the house. The debt consists
of all the cash advances received and interest on them (including
any loan fees and costs). You can never owe more than the
home's value at repayment time. Thus, if you begin collecting
at age 65, reach 100 and your home actually declines in
value (or appreciates slowly) you will have received more
from the bank than your home is worth. In such a scenario,
the debt repayment is limited by the proceeds of the home
sale, even if the amount owed is greater. Some quick facts
about reverse mortgages:
* There is no income test required.
* You must be 62 or older to qualify.
* Reverse mortgages aren't recommended for those who
don't intend to stay in the home for at least five years.
* You can choose payment as immediate cash advances,
a lump sum, monthly payments or a credit line account.
* You pay initial application fee, interest charges,
closing costs and survey fees.
* The money can be used for anything: home improvement,
travel, prescription drugs, debt pay-off, etc.
* Not all banks give reverse mortgages, so find one that
deals in Home Equity Conversion Mortgages (HECMs). Be
sure the bank counselor you deal with is HUD certified.
Time and appreciation are two vital factors to consider
when weighing the risks and benefits of a reverse mortgage.
If you live in your home beyond life expectancy and it appreciates
slowly, you may get a bargain. But if you die, sell or move
in just a few years, the real cost to you can be high.
Do the research and explore the options to see if it is
a good fit for you. Mortgage lenders report that there is
a surge in interest among seniors nationwide who are interested
in turning equity into income.
RESOURCES
Senior Help-Line (800-642-5119)
www.reverse.org
Department of Urban and Housing Development (HUD). Burlington,
VT (802-951-6290)
Home Made Money: a Consumer's Guide to Reverse Mortgages
(2001).
AARP (800-424-3410)
Reverse Mortgage Choices (2 videos on VHS, $5.00). AARP
Foundation,
P.O. Box 51040 GASD, Washington D.C. 20091
