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For Older Homeowners, a Reverse Mortgage Can Pay Off

Is a reverse mortgage worth considering? The answer might be yes — if you own your home, are at least age 62 and could use the extra cash.

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Given the current subprime mortgage crisis and the downturn in home market values, at least one expert says the sooner people engage in reverse mortgages the better, to capture the value of their homes. (Sonia Fernandez / Noozhawk photo)

If you’re at least 62 years old and could use some extra money, you may be able to get it from your home — with a reverse mortgage.

“With a reverse mortgage, you don’t need to have qualifying income and the house stays in your name,” said Rachel Brichan, managing director of the local Reverse Mortgage Division Inc.

To understand what a reverse mortgage is, it helps to compare it with the more typical “forward” mortgage. 

They’re both loans, and both require repayment. In a forward mortgage, the borrower borrows money from a lender to finance a home. As the borrower pays the lender, the borrower gains more equity in the home and the mortgage debt goes down.

With a reverse mortgage, it’s the opposite. The homeowner already has a substantial amount of equity in the home, and the lender pays the homeowner a predetermined amount of money based on the equity and the homeowner’s age. (Generally, the older the homeowner, the more money that can be borrowed.) The homeowner incurs a debt. In most cases, depending on the value of the home, the home also loses equity.

Furthermore, homeowners are not required to make monthly loan repayments for the time they spend living in their homes, but it does become payable if the homeowner moves out or passes away.

The idea of more debt and less equity may make some would-be borrowers leery, particularly those born and raised during the Depression era.

“For them, the goal was to die without debt and leave something to your heirs, otherwise, you were a failure,” said Brichan, relating an experience with an elderly woman who had millions of dollars in equity in her home but didn’t have money to feed herself.

The baby-boomer generation, she said, faces a different set of challenges: taking care of aging parents while simultaneously raising children and putting them through college. For many of them, debt is a given, Brichan said, and they might prefer to have their parents use their home to help offset rising medical expenses vs. moving their parents out of the home, selling it or waiting to inherit it.

Generally, the reverse mortgage has been used as a last recourse for elderly homeowners who need the funds to pay for home health care, but, according to Brichan, it is becoming an estate planning tool, a tax sheltering device and, in rare cases, even a way to accrue wealth, since the money can be used for just about anything.

“I’ve had clients who used the money to make home improvements, which increased the value of their home,” she said. Others used the money to pay off existing mortgages or even to buy second and third homes in other states.

Reverse mortgages, which originated in Europe as a life estate, have been experiencing a resurgence in popularity since the class-action lawsuit in the late 1990s against Transamerica resulted in tighter regulations and lower interest rates. These days, among other things, would-be borrowers are required to undergo mandatory third-party counseling to understand the ins and outs of the loan, and repayment is never worth more than the sale value of the home.

Still, according to recent AARP research, while awareness of the program has grown, many prospective borrowers are still unclear on the terms of a reverse mortgage (there are three general types) and could stand to lose out if, for example, they are planning to move out of the home within a short period of time, rent out all or part of their home or fail to keep the home insured and in good condition.

Given the current subprime mortgage crisis and the downturn in home market values, Brichan says that the sooner people engage in reverse mortgages the better, to capture the value of their homes. However, she says the move to borrow should not be made at the expense of solid research.

Like any financial vehicle, reverse mortgages have sets of fees and charges that, if not understood, could make it difficult for borrowers to enjoy the money they are expecting. One of the main concerns people have about reverse mortgages is its closing costs, which are generally higher for the federally-sponsored mortgage than other, proprietary reverse mortgages.

The closing costs are higher for an FHA-sponsored loan because part of that sum goes toward insuring the loan, said John Lucas, broker and co-author of the first edition of Reverse Mortgages for Dummies.

“It guarantees that if the provider fails to provide, the department of Housing and Urban Development steps in,” he said.

There are three main costs to look for when considering a reverse mortgage, Lucas said: “The origination fee, the monthly servicing fee and what the margin the lender is adding to the index to calculate interest.”

Generally speaking, he said, proprietary lenders may charge less for the first two fees than the government-sponsored loan. As for the margin, those looking for lower closing costs may consider a higher margin, but less margin means less interest over time.

Another thing prospective borrowers need to look out for are offers for other products, particularly from brokers who encourage a lump-sum withdrawal to purchase the products.

“They’re usually looking to get a nice fat commission,” Lucas said. Horror stories of seniors encouraged to purchase annuities with the funds from a reverse mortgage only to find that their investment would not do any good in their lifetime prompted a federal investigation several years ago.

All told, the horror stories and general confusion about reverse mortgages are keeping them from being the useful tool many seniors can use, said Five Star Finance broker John Kertis, who at 75 says he would consider one.

“It’s part of the reason I got into it in-depth,” he said. “I wanted to make sure it made sense.”

What’s important, Kertis said, is for the borrower to know exactly what they’re getting into and to have a trusted adviser who can guide them through the process.

“Old people who aren’t as astute or weren’t referred by the right people can get messed over pretty rapidly,” he said.

Even though he’s pretty comfortable now, Kertis said, in a few years he’ll be looking into a reverse mortgage of his own.

“I’m still in good shape for about another half a dozen years,” he said, “but when the time comes when I turn 80, depending on my financial situation, sure.”

Noozhawk staff writer Sonia Fernandez can be reached at [email protected]

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