When cash-strapped seniors need money for major bills and have no other source to tap, many look to their homes.
Seniors who are "house-rich," having accumulated lots of equity in their home, can tap that equity by taking out a reverse mortgage.
A reverse mortgage is a special type of loan that allows homeowners 62 and older to borrow against the equity in their homes. Equity is defined as the difference between what you owe on your house and what your property is worth.
It's called a reverse mortgage because you receive payments from the lender instead of making payments.
In other words, a reverse mortgage enables you liquidate the equity in your home for cash without selling it or incurring a loan payment as you would with a home equity loan.
As long as you live in the home, you're not required to make monthly payments toward the loan balance. You also retain ownership of your home.
The proceeds of a reverse mortgage are generally tax-free. But remember that a reverse mortgage is still a loan, with interest, fees and other costs.
Interest is charged each month, and the loan -- plus interest -- is repaid when you die, sell your home or when your home is no longer your primary residence.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage, or HECM. These loans are issued by a private bank and are insured by the Federal Housing Administration. They are only available through an FHA-approved lender.
Before getting a reverse mortgage, you are required by the federal government to undergo counseling to understand how a reverse mortgage works. Here are some of the key issues to consider:
Do You Qualify?
There are two key elements to this, according to Neil Stampe, a volunteer area manager at the Senior Source's Money Management Program.
"Are they old enough? Do they have a home with substantial equity? Because if they don't have either of those, there's no point," Stampe said.
How much you can borrow with a reverse mortgage is based on the appraised value of your home, your age and current interest rates.
Generally, the older you are, the more you can borrow.
Is It Worthwhile?
How long you plan to stay in your home will help determine if a reverse mortgage will be worthwhile.
"Do they have a reasonable expectation of being able to continue to live in the home for a number of years? Because if you take out a reverse mortgage and you end up going into an assisted living center or move in with your kids, you have to repay the loan," said Stampe.
Because a reverse mortgage is still a loan, there are costs associated with it.
Typical expenses include appraisal costs, closing costs, interest, attorney's fees, title charges, a servicing fee and a reverse mortgage insurance premium, which is charged once at closing and each month as a percentage of your outstanding loan balance.
You need to stay in your home long enough to make the expenses worthwhile. Depending on your health and other personal circumstances, you should expect to stay in your home at least four or five years, said Scott Norman, vice president of Sente Mortgage, a reverse mortgage lender.
A relatively new product called the HECM Saver significantly reduces the upfront fees of getting a reverse mortgage. However, the amount of money available to the borrower is less.
Your Heirs?
Many older adults consider it important to pay off their mortgages and pass that asset onto their children.
So before you apply for a reverse mortgage, talk to your children about your plans and their expectations.
Plano resident Judy Sedacca was fine with her mother applying for a reverse mortgage.
"Her finances were such that I was not able to help her," said Sedacca, whose mother died in 2010.
Plus, there wasn't a sentimental tie to her mother's home.
"This was not a family home," Sedacca said. "She had moved here from out of state, so I was thankful for the possibility of getting a reverse mortgage and finding someone who was reputable."
Sedacca said the reverse mortgage helped her mother.
"It was a life saver for my mother because we would have had to sell her home, and I don't know what living arrangements we would have been able to manage," she said.
Do Your Homework
"It's a very complicated process," Sedacca said. "It's essential that every single document be read by somebody who can comprehend what it means. I went through everything [with her mother]."
Some big names, such as Bank of America Home Loans, Wells Fargo Home Mortgage and MetLife Bank, are no longer offering reverse mortgages, which means you may be dealing with smaller, less-familiar lenders.
That doesn't mean they're not legitimate, but it does require you to shop around and learn about the companies and their products.
"We tell them: Make sure you're shopping around for the servicer or lender you're most comfortable with, one that has easy access and is open to your questions," said Tawnya Walters, director of housing counseling at Consumer Credit Counseling Service of Greater Dallas.
Taxes, Insurance
Many reverse mortgage holders forget that they must keep paying real estate taxes and homeowner's insurance, so be sure you can afford those costs.
You also must maintain the condition of your home.
"It used to be years ago with reverse mortgages, there was no credit concern or eligibility," Walters said. "Now, [the lenders] are placing more of an emphasis on both the credit scores as well as the financial capability of the homeowner simply because of taxes and insurance."
Walters said that in recent years, lenders have seen too many homeowners fall behind on paying their taxes and insurance, and head toward default.
"No one wants to foreclose on the elderly," she said.
In fact, as of March, 56 percent of 54,000 active HECM loans were in a repayment plan to pay off the taxes and insurance debt, according to the U.S. Department of Housing and Urban Development.
There are no restrictions on how you use proceeds from a reverse mortgage, so you could use the money to pay taxes and insurance.
Impact on Benefits
Seniors should be aware that "the reverse mortgage proceeds can affect certain types of government benefits," Walters said.
The proceeds affect benefit programs, such as Medicaid and Supplemental Security Income, which look at income and assets, HUD officials said.
However, funds from reverse mortgages don't affect Social Security and Medicare benefits.
While a reverse mortgage can help cash-hungry seniors, they're not right for everyone. Make sure you ask lots of questions and understand the product before taking out a reverse mortgage.
Tips for Borrowers
Keep these tips in mind if you're considering a reverse mortgage:
- Be sure you understand all documents before signing.
- Never sign a loan application with blank spaces.
- Understand all fees associated with the reverse mortgage.
- Shop around among lenders.
- Beware of claims by lenders that are broad, unqualified and deceptive.
- Don't be pressured in any way to get a reverse mortgage just to buy products that a company is selling.
SOURCE: Dallas Morning News research
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