Reverse mortgages have been around for a long time without
really catching on. Banks considered them more of an insurance product than
a mortgage product and they could be a hassle to service; consumers either did
not understand them or were afraid of them, and the principal marketing target
was a small sector of the American population and one that had historically
considered debt to be a very bad thing. Senior advocacy groups were pretty much
the only ones out there educating consumers and pushing banks to provide reverse
mortgages and, even though their popularity is growing slowly, only around 40,000
were written in 2004.
But the Depression era generation with its communal memories of mortgage foreclosures
is disappearing while the first of the Baby Boomers, who certainly understand
and accept debt, are rapidly approaching their mass 60th birthday. And the banks?
They always know an opportunity when they see one.
So the reverse mortgage is slowly increasing in availability and getting a
lot of notice in the press. This is probably a good thing. Understood fully
and used properly the product can be a positive addition to a retirement planning
arsenal and/or a Godsend to cash-strapped seniors.
As the name implies, a reverse mortgage is the mirror image of a regular mortgage.
Instead of a borrower paying off a mortgage in order to own his house, the house
subsidizes a mortgage which pays the homeowner.
Reverse home mortgages are predicated on the premise that many seniors
have a lot of equity in the homes they have occupied for years. Paying off the
mortgage was a major 20-year goal for folks who bought homes in the 1950s and
1960s and many have lived in debt free houses for decades. Even in the 1970s
refinancing was not a major financial game the way it is today so mortgages
once paid stayed that way. Home values, as we hear on the news every single
night, have escalated dramatically. Seems like the premise mentioned above may
be a little modest; many seniors indeed have a very high net worth.
On paper.
And there is the problem.
Some senior are what an older generation called “house poor,”
with so much money tied up in bricks and mortar that they cannot afford much
else. The tragic stories are out there; the necessity to decide between food
and heat; foregoing needed medication. Yet, for many seniors the homes they
have occupied for years may be the least expensive place they can live, especially
if it is mortgage free. But the cruel reality is that the cheapest roof in the
world is useless if you can’t afford to keep it over your head.
As values have risen, so have property taxes, hazard and maybe flood
insurance premiums. Still, an apartment, condo, or assisted living
situation may be much more expensive than staying put and could quickly drain
any cash that is cleared from the sale of the old homestead. In addition, many
of our elderly are confronting increasing medical costs – even the cost
of Medicare goes up every year, and large numbers, particularly women, have
little in the way of retirement savings. Many live on Social Security, and for
a single person that can be a very paltry sum indeed, and/or small pensions
which are ever more endangered as large corporations bail out of their obligations.
Even homeowners who have been able to save comfortable amounts toward retirement
may find reverse mortgages of interest. They can assist with unexpected expenses,
provide a few luxuries, or even be a vehicle to enable additional investments
– all while letting the homeowner continue to retire in place.
And one cannot overlook the emotional benefits of being able to stay in a home
one loves; remaining independent, and feeling safe and secure. These can even
translate into social service and health care savings that might otherwise be
passed on to the public.
The FHA/HUD sponsored loan carries pretty simple requirements; the borrower
must be at least 62 year of age, the home must be mortgage free (or small enough
to be refinanced under the constraints of the reverse mortgage,) and there are
some reverse mortgage fees involved, although by all accounts
these are not excessive and can usually be rolled into the mortgage. There is
no income requirement nor is credit (other than an unresolved bankruptcy) taken
into consideration.
In return for a mortgage on the property, the homeowner receives a loan that
is tied to the appraised value of the home and capped by the maximum FHA loan
amount for the particular geographic area. The total amount that can be borrowed
is also affected by the age of the borrower, the older he is the more he can
borrow.
Other lenders are now developing products with higher lending limits and other
bells and whistles but the FHA guarantee will probably continue to make that
product more affordable than private market products.
The borrower can receive funds in a lump sum, fixed to a line of credit to
be drawn down as needed, or paid out in monthly payments (like an annuity).
In each case interest accrues only on the amount that has actually been collected
by the borrower. Aside from required up-front fees, a borrower might view taking
a reverse mortgage as a good rainy-day strategy.
But why shouldn’t a senior just use a regular refinance or a home equity
loan to draw equity out of the house? In the latter case there are often no
fees and banks are generally offering generous rates and terms.
The problem is that banks want to be repaid in a timely manner and many seniors
do not have the income to qualify for mortgages or equity lines. Reverse mortgages
are ideal for seniors because they require no payment until the house is sold.
Further, if home prices should decline to a point where a sale does not provide
enough to cover the outstanding balance of principal and accrued interest, FHA
reimburses the lender for the difference. This is covered by an insurance fee
which FHA charges the borrower. The homeowner or his heirs retain the right
to any amount from the sale above the debt.
There are drawbacks to be sure. Disadvantages of reverse mortgages
include:
The homeowner might be spending his children’s inheritance. Hopefully
most children will be supportive of this if it means a better standard of living
for the parent.
The vagaries of age might make such cash availability dangerous. Families should
be prepared to monitor draw downs and/or expenditures if this is a risk.
If a reverse mortgage looks like a good idea for you or an aging relative you
may still have to do a little research. If a local bank or mortgage company
is no help try the FHA Web site, a senior advocacy group such as AARP or a local
senior center for information on reverse mortgages. And be
sure and consult with an attorney or financial advisor on the terms and personal
ramifications of such a loan.