Reverse Mortgages
Reverse Mortgages - What are they? Is one right for you?
The "Golden Years" - Undermined by common financial problems
Many seniors are entering what is supposed to be their "golden years" with bleak prospects because of two common problems - increasing debts and lower buying power.
Some people are still saddled with past debts from their working years. Others find that they are in debt due to declining health or increased needs. Some take on debt in a well meaning attempt to help their children out of a financial problem. Whatever the cause, almost all seniors have lower buying power than they did when they were younger, because they are retired or semi-retired, and their income, be it from pension, savings, investments, or social security, is not nearly what is was when they were working. Sound familiar?
One other thing that many seniors have in common is their main asset - their house. Many elderly people own a home, and often they have either substantial equity in the home, or they have completely paid off their mortgage and own the property free and clear.
While some people seek to consolidate debts by obligating themselves to a new mortgage loan or obtaining a second mortgage, many seniors don't have sufficient income to qualify. Even if you qualify for the loan, the prospect of paying off a 30, 20 or even 15 year mortgage note may mean having to tighten the belt and live a spartan existence for the remainder of one's life.
What are they? Are they for you?
There is another option for borrowing money from a commercial lender against the equity in a home, called the "reverse mortgage". Since their introduction in 1989, nearly 20,000 elderly Americans have obtained reverse mortgages, which are also known as home equity conversion mortgages.
Under a reverse mortgage, homeowners retain ownership of their homes while collecting a monthly payment, or in some cases a lump sum payment, from the lender. When the owners die or move out, the lender gains ownership of the home unless the heirs or the senior borrowers themselves pay off the loan. The homeowners may also sell the home and repay the lender with the proceeds from the sale.
Reverse mortgages may be a good option for seniors for whom selling their home may not be profitable due to capital gains taxes, and who are seeking to improve their standard of living by increasing their income. Some seniors are reluctant to mortgage their house and reduce their estate's value because they worry about what their children might think. However, the peace of mind of knowing that one's parents are more comfortable is a definite plus for many families.
Of course, reverse mortgages are not for everyone. They can be costly, and an elderly homeowner may only see 30 to 80 percent of the value of their home through a reverse mortgage. There are also closing costs and service fees that can range from $20 to $30 per month. Some carry fixed interest rates and some are adjustable.
Reverse mortgages also come in a wide variety of options, shapes and sizes. A reverse mortgage that worked for your neighbor may be the worst thing for you.
Beware of scam artists
Further confusing the issue are a number of unscrupulous lenders and telemarketers who sell information about reverse mortgages to elderly people for outrageous fees, from hundreds to even thousands of dollars.
In early 1997, the U.S. Department of Housing & Urban Development (HUD) identified six companies in the western U.S. who were running scams like this.
The same information that these "consultants" were charging thousands for was available for free from HUD, the American Association of Retired Persons (AARP), Consumer Credit Counseling Service, and from reputable lenders.
Reverse mortgages are difficult to understand; deciding which type (if any) is right for you can be even more confusing. To help consumers, government rules require people considering reverse mortgages to receive free counseling sessions conducted by government approved lenders, retiree associations and financial counselors.
While there are many types of reverse mortgages, all have certain similarities.
How does a reverse mortgage work?
A homeowner can choose a monthly annuity payment, or opt for a lump sum payment, or a line of credit account from which they can draw money when they need it, or a combination of the three. They are offered by private companies, such as Transamerica Corporation and Amerifirst Mortgage.
The Federal Housing Administration (FHA) insures reverse mortgages offered by HUD approved lenders around the country. Reverse mortgages carry several conditions. The homeowner must live in the residence for the duration of the loan. The amount borrowed must be no more than the appraised value of the home or the maximum value allowed by HUD in a given locality, whichever is lower.
The older a homeowner, the more money they can receive with a reverse mortgage. At current interest rates, a 62 year old can expect to receive about 30 percent of the value of the home, while a 95 year old may receive 80 percent.
AARP outlined several other important characteristics of reverse mortgages. These should be kept in mind when considering whether to obtain a reverse mortgage:
- Reverse mortgagors (borrowers) remain the owners of the home. Accordingly, they are still responsible for all applicable taxes, insurance, maintenance, and repair.
- Reverse mortgagors can never owe lenders more than the value of their home at the time the loan is repaid.
- Reverse mortgage loans must be repaid, either in cash or through transfer of the deed to the home, when the borrower dies, moves away, or sells the house.
Use caution
Most financial counselors advise seniors to be careful when considering a reverse mortgage. While a reverse mortgage can be a great opportunity for an older person to draw on the equity of their home to obtain a better lifestyle, they are not for everybody.
A good thing about them is when you take a reverse mortgage, of course, you don't have a mortgage payment anymore.
However, because of the disparity in the amount of home equity that younger borrowers can get versus what older borrowers can get, it may be wise to hold off. After all, the older you are, the more money you will get from a reverse mortgage.
For additional information
The U.S. Department of Housing and Urban Development (HUD) offers free information regarding reverse mortgages. Call HUD at (888) 466-3487.
Consumer Credit Counseling Service also offers help at (800) 288-2227.
AARP offers a videotape and brochure explaining reverse mortgages for a fee of 5 dollars. Call (202) 434-6042 or write AARP Foundation/Reverse Mortgage, P.O. Box 51040 GASD, Washington, D.C. 20091.
Reverse Mortgages
Senior homeowners can get monthly or lump sum payments from their home equity, getting loans called "reverse mortgages". Here's what a homeowner might expect from a reverse mortgage, assuming the an interest rate of 6.85%, financing of closing costs and the initial mortgage insurance premium, and a monthly servicing fee of $30.
Tenure payment plan (lifetime)
Age Maximum claim amount or property value, whichever is less
|
$75,000 Monthly Lump Sum 65 $187 $28,30075 $272 $37,600 85 $437 $47,900 |
$100,000 Monthly Lump Sum $266 $40,400 |
$125,000 Monthly Lump Sum $345 $52,400 |
$155,000 Monthly Lump Sum $441 $66,900 |
Age Maximum claim amount or property value, whichever is less
Source - Consumer Credit Counseling
Author: Blake Fetrow, Legal Aid Bureau, Inc.; substantively updated 02/28/08 (PLL/M.A.J.)
|
$75,000 Monthly Lump Sum 65 $332 $28,300 |
$100,000 Monthly Lump Sum $473 $40,400 |
$125,000 Monthly Lump Sum $614 $52,400 |
$155,000 Monthly Lump Sum $784 $66,900 |
Term payment plan (10 years)
