reverse mortgages: bad idea or blessing? by Norma J. Goldman   Find out more about Free Will Baptist Board of Retirement at www.boardofretirement.com.

Reverse mortgages account for only a small fraction of home loans today, but the demand for them is growing as the cost of living escalates and retirees’ income from savings and investments is on the decline.

What factors determine if a reverse mortgage is a good or bad idea for seniors? Impartial and expert advice is essential, and believers will want to take further steps. Let’s begin with some basic information and review potential sources of additional help.

What exactly is a reverse mortgage?

Think of it as the mirror image of a traditional mortgage, when you borrow money to buy a house, repay the debt and build up equity (your percentage of ownership) over time. With a reverse mortgage, you take that equity out (gradually or in a lump sum), increasing your debt. The lender collects up-front fees (which can be hefty) at the time of closing, but principal and interest on the debt is not repaid until you or your heirs sell your home.

Today, millions of seniors are receiving letters that look very much like they came from the U. S. government announcing eligibility for “a government-backed reverse mortgage program.” The letter goes on to say that “this special senior program is administered by the U. S. Department of Housing & Urban Development (HUD) and your funds are available now.”

The promises made in this and other similar offers include: (1) the elimination of your current mortgage (if any); (2) no monthly payments of any kind on the proceeds distributed to you during your lifetime; (3) your heirs can inherit your home; and (4) you can stay in your home for the rest of your life.

Do you really need the money? If so, can you get it some other way?

If you have money in savings and enough in a pension or some type of guaranteed income that allows you to live the kind of life you want, you really have no reason to take out a reverse mortgage. Perhaps a home equity loan would be a better choice.

For example, if you want to make a home repair or improvement, or need help paying your property taxes, you may want to find out if you qualify for a low-cost, single-purpose loan that may be available in your area. Area Agencies on Aging (AAAs) generally know about these programs.

To find the nearest agency, www.eldercare.gov, or call toll free: (800) 677-1116. When you call, ask for information on “loan programs for home repairs and improvements,” or “property tax deferral/postponement programs.”

Ask yourself if your “need” for immediate money is actually a “want.” Consider future needs which may prove to be more of a financial challenge than what you are experiencing today.

What are the advantages of a reverse mortgage?

The most obvious advantage is a large amount of cash for a senior whose retirement income is insufficient to meet basic needs. Others use the funds to remodel or upgrade their homes, pay off debts, or supplement income for specific goals such as travel. Seniors must be at least 62 years of age in order to get a reverse mortgage, and those gaining the most advantage are borrowers in their 70s (shorter remaining lifespan) with low (or no) mortgage balances and no heirs.

Reverse mortgage borrowers don’t need good credit, a high income, or ample savings to qualify, as would be required for a home purchase. Loan advances are not taxable and generally do not affect Social Security or Medicare benefits. Because you retain the title to your home, you are still responsible for taxes, insurance, utility fees, maintenance, and other costs.

Funds can be distributed in a variety of ways including a lump sum, fixed payments for life (no matter how long you live), fixed payments for a shorter, pre-determined period, or a credit line account that lets you withdraw cash at any time. Borrowers may use the money any way they like and no credit checks are required.

What are the disadvantages/risks to borrowers?

There are several, but one of the biggest is the price tag. Borrowers can be charged as much as $10,000 to take out a $200,000 reverse mortgage after covering the 2% lender’s origination fee, 2% mandatory mortgage insurance and other costs such as title insurance, appraisal, and even repairs. Borrowers are also assessed .05% of the loan balance in mortgage insurance premiums annually and many plans assess other fees and charges as well.

If you are eligible for low-income assistance from the Federal or State Government (like Medicaid), you will want to be careful that the income you receive from a reverse mortgage does not disqualify you from that assistance.

You might want to reconsider if you are planning a move in a few years. Since the up-front costs are higher than other loans, this could greatly impact settlement costs (and therefore the proceeds) when you sell. Borrowers must live in the home as their principal residence.

Rates on reverse mortgages may be fixed or variable, which means they can move up or down. There are caps on the variable rate (5% over the life of the loan), and the rate cannot rise more than 2% in any year.

Reverse mortgages decrease home equity, affecting your estate. If you desire your home to pass to your heirs, a hefty reverse mortgage loan balance could make it all but impossible for them to keep the family home. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a primary residence.

If heirs are in the picture, it’s best to discuss your plans with them before taking out a reverse mortgage, giving special attention to how the loan will be repaid after your death.

How Much Can You Get?

The four principal factors that determine how much you can borrow are:

1. The present market value of your house (less the amount owed);

2. The location of the home;

3. Current interest rates; and

4. Your age
   

AARP has a web page with a mortgage calculator that consumers can use to get an estimate of what they might expect based on the factors listed above, and the calculator makes a comparison between cash available through an HECM or HomeKeeper™ reverse mortgage.

Get Help!

Daniel Solin, author of The Smartest Investment Book You’ll Ever Read counsels, “Before committing to a reverse mortgage, seek financial counseling. It is required for FHA-insured reverse mortgages, but even if you are considering private reverse mortgages, it is critically important that you understand the full financial ramification of these loans.”

As good as they sound, reverse mortgages are not for everyone. The details of your specific situation will dictate whether or not you should take this important step. As with any major life decision, solid fact-finding and sound counsel from a trusted godly advisor is the first step. Add prayer, and you have a formula for making the right decision!

About the Writer: Former magazine editor Norma J. Goldman enjoys a freelance writing career in her retirement. She lives in Nashville, TN. Learn more about your retirement options at www.boardofretirement.com.