Reverse Mortgages Provide Extra Cash for Homeowners
By Janet Ellen Hill

Stock dividends, though back in favor, are not what they used to be. Interest rates on bonds, CDs, and savings accounts are ridiculously low enough to make you wonder why they even bother, while health care costs are steadily increasing. Where can retirees find additional cash to live a little more comfortably?

One idea would be to sell the homestead, find a less expensive place to live, and reinvest the proceeds for more income. But this is a tough decision. It may involve moving away from family and friends, especially when the smaller living spaces in the area, like townhouses or condos, are incredibly expensive. There’s an emotional factor, too: how many people can easily part with the house both they and their children were raised in? If their vision has been for their home to stay in the family when they are gone, it becomes nearly impossible to sell it.

Fortunately, there is a way for seniors to keep their homes and use them to supplement their retirement income. With a reverse mortgage, homeowners can convert the equity in their homes into cash that they can use for any purpose they choose.

How does a reverse mortgage work?

Reverse mortgage borrowers make no payments during the life of the loan, but the total amount borrowed becomes repayable with interest when the last living borrower either dies, sells the home, or moves out of the home permanently. All reverse mortgages are “non-recourse” loans. This means that the borrowers (or their heirs) can never owe more than the value of the home, regardless of loan balance.

Cash can be taken in a single lump sum, on a line of credit basis, in regular monthly payments, or in any combination of these options. Each withdrawal or payment received by the borrower increases the mortgage balance, which is the reverse of a conventional mortgage in which the borrower makes payments that reduce the mortgage balance.

To be eligible for a reverse mortgage, all owners of the home must apply and be at least 62 years old and using the home as their primary residence.

State and local governments usually offer the least expensive loans. But most stipulate that the proceeds must be used for specific purposes, such as paying for home repairs or property taxes. Some private institutions, such as banks, mortgage companies, and savings associations, offer reverse mortgages that can be used for any purpose—but these involve higher administrative costs.

How much money can I borrow?

The amount of cash you can get from a reverse mortgage generally depends on your age, your home’s value and location, and the cost of the loan. The greatest cash amounts typically go to the oldest borrowers living in the most expensive homes.

To get an idea of how much a reverse mortgage might provide, I used the Reverse Mortgage Calculator on the Financial Freedom Web site, www.financialfreedom.com. Financial Freedom Senior Funding Corporation is a major private reverse mortgage provider. For a 63-year-old in Salt Lake County, Utah with a home valued at $230,000 and no mortgage, the calculator yielded the following estimated payment amounts:

·         FHA/HUD Loan: $112,910 lump sum or line of credit, or monthly payments of $688.

·         FannieMae: $35,973 lump sum or line of credit, or monthly payments of $286.

·         Bank Loan: $36,014 lump sum or line of credit (no monthly payment option).

The process of applying for a reverse mortgage differs somewhat from a conventional mortgage. To ensure that the prospective borrower understands how the reverse mortgage process works, they must meet with a HUD-approved counseling agency. This counseling is mandatory, regardless of which reverse mortgage product a borrower chooses.

Meetings are usually face-to-face, although telephone counseling is becoming more common. The counselor provides supplemental information on reverse mortgages, determines whether the borrower is eligible to get a reverse mortgage, and discusses other options that may be available to the borrower to assist them with their daily living. Once the counseling meeting has taken place, the process then resembles a conventional mortgage application with the obligatory appraisal, title work, lien payoffs, and so on.

While reverse mortgages are not for everyone, they certainly are worth consideration if you need additional cash, have little or no mortgage on your home, and do not want to sell. A wealth of information is available from AARP (800-424-3410), The National Reverse Mortgage Lenders Association (202-939-1760), and Fannie Mae (800-732-6643).

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Janet Hill is a financial consultant practicing in Salt Lake City. She offers investment and senior financial planning as a registered representative of Commonwealth Financial Network—a member firm of the NASD/SIPC. She can be reached at janetellen@meridianmagazine.com.

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