Reverse Mortgages

If You Can Stand the Price, Reverse Mortgages May Be a Good Way to Stay Solvent in Your Later Years

For senior citizens (those over 62) looking for extra income, reverse mortgages have become increasingly popular. Instead of selling your home or taking out a home equity loan, which must be repaid, to get access to the equity in their homes, you get a reverse mortgage instead.

The big run up in house prices in most of the country means most homeowners can presently get more for their homes than before. This combined with the fact that interest rates have been so low for so long has made this a very attractive option in spite of high costs.

With a reverse mortgage the bank lends you a portion of the value of your home. You do not pay back the mortgage, but rather use the money for any purpose. The money is considered a loan advance and is tax free. The money can be taken as a lump sum or in periodic payments or as a combination of the two.

If you already have a mortgage or other debt, it will be paid off from the loan proceeds and the rest of the money can be used as you please. Thus, you will be debt free and still have your home.

If you decide to move or die, the house is sold and the proceeds used to pay the loan. If the sale price is higher than the loan, you or your heirs get the balance.

If not, the bank – actually the FHA – is on the hook. In that case, neither you nor your heirs have any further liability.

However, this is a very expensive way to borrow. You must pay a mortgage insurance premium of 2% of the loan amount, plus another 2% or so in fees and other costs. These include a monthly service charge around $30, all of which is deducted upfront.

A $300,000 loan can carry fees of $15,000 or more.

The amount that can be borrowed is capped by the FHA at $360,000 in most parts of the country and not all dwellings will qualify.

In spite of the high costs, the loans are becoming more popular. Elderly homeowners are not only debt free, but have some extra money to spend. Their children’s inheritance might be whittled away, but it is often a better alternative that struggling with mortgage payments or not being able to pay medical bills.

Some people are even coming back for a second or third reverse mortgage as their house value has risen.

If you are interested in a reverse mortgage, shop carefully. Look at lenders with lower up front fees and also consider the implied interest rate of the loan. Yes, the loan carries interest just like any other mortgage. The interest will be added to the loan amount rather than repaid as in a conventional mortgage.

Make sure that there is no way that you can be dispossessed from your home for any reason – except possibly if you deliberately drive down the home’s value.

The American Association of Retired People (AARP) has reverse mortgage counselors on staff.

For truly independent advice, consult a fee-only-based financial planner. Look for one that has at least the Certified Financial Planner (CFP) designation after his name.

He or she will be able to go over all the ramifications of such a loan and should even be able to help you find a better deal.

You will also need a qualified real estate lawyer to protect your interests. Get the names from your local bar association’s Lawyer Referral Service. This is no time to rely on the lender's lawyer.

There is no such thing as a free lunch and a reverse mortgage certainly wouldn’t qualify. At this stage in your life it pays to be careful with what is probably your only remaining major asset.

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