Reverse Mortgages

Reverse Mortgages Not Always the Right Solution
Reverse mortgages may seem attractive, but upfront fees can be steep, and it's not 'free money'

May 30, 2010



By JANICE PODSADA
The Hartford Courant, Conn., (MCT)




While reverse mortgages can provide much-needed cash for many situations, experts advise seniors to consider all the costs before signing on to a reverse mortgage.

Retired and in their late 60s, a Middlebury, Conn., couple was still paying off an $80,000 second mortgage that they'd taken out to send their four children to college.

"My husband was forced into retirement and I was only working part-time," said the wife, 68, who asked that their names not be used. "This is a very personal, private thing that we've done with our money."

Although they had paid off their home's first mortgage, the loan payment for the second mortgage was costing them $640 a month.

A year ago, the couple consulted with their four children, and took out a reverse mortgage on their $380,000 home. The reverse mortgage paid off the $80,000 they'd borrowed and gave them a $200,000 line of credit.

"The freedom of not having to pay out that $640 every month was unbelievable, especially when you're retired," she said.

Because they have other sources of retirement income, the couple has not touched the $200,000 line of credit. "We can use it if we want or let it sit there. It gives us peace of mind to know we've got that $200,000 line of credit," she said.

"You do have to sell the house after either my husband or I would pass, but our kids are O.K. with that."

Mark Harrington of Horizon Home Mortgage in Windsor says "Reverse mortgages were developed to allow baby boomers -- specifically people age 62 and over -- the opportunity to remain in their homes." .

But relatively few seniors have opted for a reverse mortgage. Since they were introduced in 1989, only 600,000 homeowners have taken out a reverse mortgage. The upfront fees can be steep and many consumer advocates say a reverse mortgage should be a last resort for meeting financial needs.

To qualify for one, you must be 62 or older and own your own home outright or have a low mortgage balance. But fewer than 1 percent of eligible homeowners have obtained a reverse mortgage, a home mortgage loan in which the lender pays you.

A reverse mortgage allows homeowners to convert a portion of their home's equity into cash. The loan can be taken in the form of a monthly payment, a lump sum, a line of credit or a combination.

Buying A Smaller Home
The Federal Housing Authority recently introduced a new type of reverse mortgage for seniors, intended to streamline the process of downsizing, selling their current residence and buying a smaller home. The "Reverse Mortgage for Purchase" allows eligible homeowners to buy a new home and take out a reverse mortgage as a single transaction, thereby reducing closing costs.

"People were doing this anyway," said Susanna Montezemolo, vice president of federal affairs at the Center for Responsible Lending. "This new category of reverse mortgage reduces costs."

Unlike a traditional home equity loan or second mortgage, repayment of either type of reverse mortgage is not required until the homeowner dies, moves or sells the home.

"A lot of people think that once you run out of the money, it triggers a repayment event," Harrington said. "That's not the case."

The proceeds from the sale of the residence are used to repay the lender. If the proceeds don't cover the loan amount, the homeowner's heirs are not responsible for the shortfall.

"You [or your heirs] will never owe more than the value of the home if you sell the property to repay the loan, even if the value of your home declines," according to the National Council on Aging's guide, Use Your Home to Stay at Home.

Although the income you receive from a reverse mortgage is tax-free, it can affect your eligibility for certain need-based benefits such as Medicaid and Supplemental Security Income.

And if you want to make repairs or alterations to your home, there are cheaper ways to borrow money than a reverse mortgage, which can be very costly, said Norma Garcia, senior attorney for Consumers Union, which publishes Consumer Reports. She notes that some cities and states have low-cost home-improvement loans and grants for seniors.

"Anyone considering a reverse mortgage should seek independent, HUD-approved counsel," Garcia said. "It should not come from the company that has an interest in selling you a reverse mortgage.

"There are many options with respect to reverse mortgages and they can be confusing," she added. "Even if you've had a home mortgage, this is an entirely different product. A good mortgage counselor can help you to decide whether a reverse mortgage is good for you."

Upfront Fees
To acquire a reverse mortgage, "you pay a lot of fees upfront," Montezemolo said.

"You can pay thousands of dollars before you're ever paid a dime," Montezemolo added. "If you need to make repairs or alterations and have retirement savings or other sources of income, you're better off tapping into those savings or other sources because there is no upfront fee to get the money."

The amount you can borrow is based on the appraised value of your home, interest rates and your age, a critical factor. The younger you are when you obtain a reverse mortgage, "the longer the compound interest will grow and the more you'll owe," AARP experts caution.

"The average client we see is about age 72," Harrington said. At that point, they qualify for about 60 percent of the value of their home."

"Most of the negatives floating around are dramatically overstated," said Jeff Lewis, chairman of Generation Mortgage. "As long as you maintain your home and pay your property taxes and insurance, you can't be forced to leave. Homeowners still retain title and ownership to their homes during the life of the loan, and can choose to sell it at any time," Lewis said.

A reverse mortgage can be a good option, but not the best option if you have other sources of income, Montezemolo said. And if you plan to leave your home to your children, tapping into your home's equity with a reverse mortgage may leave them with less.

"With the ads they run late at night, people get lured into reverse mortgages. Sometimes I get the sense that people think it's free money. It is a loan. There are fees. It has to be paid back," Montezemolo said.
To find an independent counselor in your area go to: http://tinyurl.com/2upalae.


To view HUD's home page on reverse mortgages, officially known as Home Equity Conversion Mortgages, go to: http://www.hud.gov/offices/hsg/sfh/hecm/hecm--df.cfm


AARP publishes a 44-page booklet on reverse mortgages. "Read this guide figure out the questions you have and then go to counseling, said Montezemolo. Go to click on "Reverse Mortgage Loans: Borrowing Against Your Home"