Today, several of the new skin products being marketed tout that they can reverse the signs of aging. They make claims that they can remove wrinkles or increase energy or improve memory. I don’t know if any of these products can deliver on their claims. But for seniors 62-years-old or older who own (or almost own) the home they live in, there is a way to reverse one thing in their lives, the mortgage on their homes. How? In a typical mortgage, a home owner pays the bank a monthly amortized amount. In a reverse mortgage, the direction of payments is reversed. The home owner pays nothing each month and receives money from the bank. Does this sound too good to be true? Is this another anti-aging product gimmick? It’s not.
For many seniors, a reverse mortgage is a sound financial planning tool, and according to Paul Conlin of Greenpark Mortgage Company in Needham, Mass., “A reverse mortgage might be the ideal option for seniors to maintain their financial independence.”
Some Reverse Mortgage History
Reverse mortgages have been available in the United States since 1961 but with considerable variation from one region of the country to another. In 1991 the Federal government expanded its insurance of reverse mortgages, thereby increasing the availability of reverse mortgages across the map. And with the rising cost of healthcare, unanticipated increases in inflation, pension plans going under and the unpredictable nature of Social Security more seniors are looking towards their houses for the cash they need. In fact, as property values have risen, a number of seniors who took out reverse mortgage loans years ago are returning for second and even third reverse mortgages to harvest the additional equity that has built up in their homes. “Most senior homeowners just want to remain comfortable in their own home.” States Ed Barrett, a reverse mortgage specialist from Your Home for Life in Westwood, Mass. “With the rising costs of everything today, that is becoming harder and harder to do. Now, with the federally insured reverse mortgage, there is a new option available that really provides for financial security and peace of mind. It really can be Your Home For Life.”
According to the Federal Housing Administration, which insures most reverse mortgages, by September of 2005, homeowners had taken out about 43,000 reverse mortgages, that was up from about 37,829 the year before and from 7,700 in 2001. And demand continues to rise with 56% more loans taken out in the first quarter of 2006 than in 2005.
The Ins & Outs of Reverse Mortgages
To qualify for a reverse mortgage at least one person on the home’s title must be 62 years old, the home must be the owner’s primary residence (i.e., the homeowner must actually live in the home) and the home must be owned outright or the reverse mortgage loan must be used to pay off the outstanding mortgage balance. The Federal reverse mortgage loan program has a cap on the size of the mortgage loan it provides so for those seeking amounts in excess of the Federal limits, state programs and private lenders are a better choice. For both Federal and state programs, there may be restrictions on the types of residences that qualify. For example, under the Federal program condos are eligible but shareholder-owned cooperatives are not. In Massachusetts SFR, MFR (1-4 units), Condo’s, and HUD-approved manufactured housing are eligible. Loans generally are written for no more than one-half to two-thirds the value of a home and even if the value of the home changes while the loan is outstanding, the borrower only owes the amount of the loan.
The repayment amount can never exceed the value of the home. In fact, under the Federal program, the government makes up the deficiency, if any, to the lending institution, and while Private Placement programs are not insured, all are “non-recourse”.
The borrower decides how to receive the loan money. There are four payment options: (1) an up-front lump sum payment, (2) a line of credit, (3) fixed monthly payments or a combination of a line of credit and fixed monthly payments.
With any of these options there are fees and costs but many of these are the same fees and costs that would be incurred with any loan; for example, there’s an origination fee, an up-front mortgage insurance fee, an appraisal fee, and standard closing costs.
As far as Uncle Sam is concerned, the money received from a reverse mortgage is not taxable as income, regardless of the way the money is paid. Likewise, many states do not consider reverse mortgages as income and neither do they count as disqualifying resources for most Federal and state public assistance programs.
A reverse mortgage must be carefully evaluated as it is more complex than other secured loans (like home equity loans, for example). It is suggested that seniors considering one seek the advice of a legal, tax or financial advisor. In fact, the law requires that seniors receive counseling before they obtain a loan. Typically, such counseling covers budgeting and general financial planning, as well as the tax implications and Medicaid/public assistance ramifications. The AARP, Fannie Mae and HUD are three agencies that provide counselor referrals.
As previously mentioned, reverse mortgage loans, contain fees and costs. However, the fees and costs are low and are not paid out of pocket or up front. They are added to the total loan amount along with the interest, and are paid when the loan’s term expires. For a reverse mortgage that is structured as monthly payments for life, this can mean that the estate will pay off the loan.
The Federal reverse mortgage program assumes a life expectancy of 100 years, thus, monthly payments may be lower for seniors closer to age 62 than for those nearer to 100. The life expectancy assumed by Massachusetts, as well as for all other programs is 100 years.
One thing about reverse mortgages that seems to worry most seniors is that having a reverse mortgage loan will prevent their children and grandchildren from inheriting the home. Seniors who want to make sure that their heirs are provided for could take advantage of the new transfer rules under the Deficit Reduction Act of 2006 which allows, among other things, that transfers made five years prior to an application for Medicaid will be outside the look-back period and will not be penalized. This means that if a senior gives some of her savings and investments to her grandchildren (for example) five years before she needs Medicaid, she will be outside the look-back period and qualify immediately, provided of course, that she is careful not to make it seem like the transfer was made for the sole purpose of qualifying.
And even if seniors do not take advantage of the new transfer rules, the rising costs of real estate should protect the home for their heirs who can sell the house and use the proceeds to pay off the reverse mortgage note and keep the profit.
In fact under the Deficit Reduction Act, seniors with more mortgage on their home may fair better (in some circumstances) that those who have higher equity. The new law’s limit on home equity of $500,000 (which can be increased up to $750,000 at state option) may well mean that seniors owning homes with greater equity could risk not qualifying for Medicaid coverage. But if the equity is tapped using a reverse mortgage loan, this may shelter those seniors from disqualification.
Because You Were Curious: Other Home Equity Conversion Mechanisms
The desire of seniors to utilize the value of their homes’ equity while continuing to live in their homes has led to banks offering various other home equity conversion mechanisms in addition to reverse mortgages. Home equity loans, sale-leasebacks and financial arrangements in which seniors retain a life interest in the home while selling the remainder interest are other ways for seniors to harness the equity in their homes. However, none of them are as beneficial to seniors or are as easy to obtain as a reverse mortgage. For example, most home equity loans require that the borrower demonstrate a dependable source of income that can support monthly repayment obligations thus most seniors in retirement are not likely to have the income that is necessary to obtain a home equity loan; and in a sale-leaseback (where the home is sold and then simultaneously leased back to the person for life) or a sale of a remainder interest transaction (where the homeowner retains a life estate in the home while selling the remainder interest) a major concern, in each of these transactions, is that it may be difficult to find a suitable buyer who is willing to buy the home subject to the sort of leasehold restrictions that an older homeowner requires. In sale-leaseback and remainder interest transactions, there are also tax and public assistance issues that may not make these viable options for seniors.
Reverse Mortgage in Summary
A reverse mortgage is a financial planning tool that is increasingly being used by senior homeowners from all walks of life. They are an attractive option that allows seniors across the economic spectrum to have more cash by increasing the liquidity of an asset that most do not think of as liquid, a home. According to Barry Aldorisio of Rockland Trust in Burlington, Mass., “Reverses offer a better quality of life for those who need more cash flow than offered by a pension or social security benefits and enable much needed repairs to your home to be made, all without making a single monthly payment,” and while reverse mortgages can’t remove wrinkles, increase energy or improve memory, they do help seniors lead a richer and more rewarding life.
To help you choose a reverse mortgage company, we have provided our preferred reverse mortgage specialist:
555 High Street
Westwood, MA 02090
(781)329-6644 or (508) 654-4656