The nation's hot housing market has created an alternate source of wealth that can help many senior citizens stop struggling each month to make ends meet.
Reverse mortgages, when executed correctly, can unlock hundreds of thousands of dollars in equity that seniors can use to live better, without taking out another loan they must repay or worrying about losing their homes. The catch is: reverse mortgages are complex, expensive loans that will affect the heirs. So it is doubly important to understand how they work.
With most mortgages, the focus is on the interest rate. With a reverse mortgage, however, the focus is on the value of the house. Since the people getting a reverse mortgage won't be paying off the loan, the interest rate is not really important to them. That's because a reverse mortgage, as its name implies, lets homeowners who are age 62 or older take equity out of their houses without having to sell their property or repay the money. The loan will be paid back eventually, but not until the owner moves permanently out of the house, either to retirement living, a medical facility, or at death.
"Do not focus on the interest rate," advises Anna DeSimone, of Integrated Client Solutions, an Arlington, Mass.-based consulting firm specializing in mortgage lending issues such as reverse mortgages. "Focus on the big picture."
A reverse mortgage really does encompass the "big picture" because it touches the home, family, estate, inheritance and heirs, and it can also play a major role in how comfortably people live. It also is the most complex mortgage most people will ever get, and it probably will be their last one. There are some requirements. The homeowner(s) must be at least age 62, and the house must be completely or largely paid off. If it is not completely paid off, part of the equity drawn out of the house will go toward paying off the existing mortgage. This way there is only one lien holder -- the company providing the reverse mortgage.
The amount of money received will depend upon the homeowner's age and the value of the house. The older the homeowner is, the more money he or she can get. The funds are available as a lump sum, a line of credit, a regular monthly annuity, or any combination of the three. The loan does not get repaid until the last homeowner moves out.
At that point, the there are two options on the table. The lender can sell the house to recover the loan amount and pass what's left to the owner or the heirs. Or the owner or heirs can pay off the loan and keep the home in the family. If, however, the house is worth less than the amount owed, the heirs lose nothing. The lender loses, and he or she will sell the house and take the proceeds. The heirs do not have to make up the lender's loss.
DeSimone says that senior citizens who get reverse mortgages fall into three broad categories, each with their own needs and priorities. They include the extremely wealthy; those who cannot afford to maintain a home, and those who are doing all right but want access to ready cash.
"There are a number of very high-wealth individuals who can make good use of their equity for investing and estate planning purposes," DeSimone explains. "They want to set things up so they can pass on their wealth to their heirs." When these people take out reverse mortgages, they are usually working through an estate planner or tax attorney.
"The largest group is in the middle: people who can afford their homes, but are not wealthy." She says this group uses reverse mortgages the least. "They are probably pretty healthy and maintaining their lifestyle. These people need to think about tapping into their equity. They could use it to enjoy life more, or to help their loved ones. Maybe they want to help their grandchildren go to college."
On the bottom rung of the financial ladder are "those who cannot afford to maintain a home," DeSimone adds. "The money they pull out of their home can keep them going and help them stay in their home." Their homes may be paid for, but they still pay taxes and can incur other home-related expenses, such as upkeep and repairs. A reverse mortgage could provide the income to help meet these expenses.
While a reverse mortgage may be the right answer for many, there might be other, even better, options. DeSimone points out that HUD backs 90 percent of all reverse mortgages and requires anyone who applies for one to take a free loan-counseling program with counselors trained by AARP. Many private lenders also require loan counseling, a practice that is in the borrower's best interest. Lenders who do not require free counseling are more concerned with making loans than with making sure borrowers really need and understand the loans.
"The first thing a loan counselor needs to do is see what programs there are for older Americans through the state or federal government, or other agencies, that the people might be able to qualify for," she says. These include community grants, low-cost loans for home repair, property-tax relief programs, and other programs.
Another issue with reverse mortgages is their high cost. The origination fee is often 2 percent of the value of the home. Another 2 percent might be charged as closing costs and 2 percent more for insurance. But the borrower does not have to come up with the cash, since it is added to the amount borrowed. One of the most important questions seniors must ask themselves is how long they can reasonably expect to stay in their home. The longer they stay, the "cheaper" the reverse loan becomes in terms of amortization.
If you or someone you know is considering a reverse mortgage, the first thing to do is learn about these loan products. Go online: www.reverse.org. The site is maintained by the not-for-profit National Center for Home Equity Conversion and offers a detailed, objective look at the entire reverse mortgage process.
Education is critical, especially given the complexity of reverse mortgages and the ripple effects they can have on families and fortunes. But used intelligently, reverse mortgages can give seniors the financial ability to make their lives -- and the lives of those who care about them -- easier and more comfortable.
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