The Rebound of Reverse Mortgages

by Sherri Mahoney-Battles

Every once in a while I find myself having second thoughts about an opinion I’ve formed. Such is the case with reverse mortgages. Reverse mortgages are making a rebound, and there are some good reasons for this.

In the past many Americans took advantage of reverse mortgages quickly drawing large amounts and later falling into financial trouble. More in-depth counseling features provide greater budgeting guidance and offer a detailed review of the various programs and rate options available. Additionally, new rules require loan applicants to undergo detailed financial assessments. The goal is to reduce current default rates that are roughly double the level of regular mortgages.

The market has changed regarding reverse mortgages for several different reasons. People are becoming more educated about reverse mortgages and they are losing a lot of the stigma that had them previously labeled as “bad” loans geared towards taking advantage of elderly people.

Many older people are also finding themselves in a home that they aren’t ready to leave with a higher cost of living and a retirement income that just doesn’t meet their budgetary needs. For many people, their home is their largest asset and the need to meet daily living expenses is overriding their need to leave a home as a legacy to children who already have homes of their own.

If you are over sixty-two and are having a hard time making ends meet on social security, looking for money to finance a home improvement project, pay off your current mortgage or pay for healthcare expenses, you might be considering a reverse mortgage.

What is a reverse mortgage? With a “regular” mortgage you are required to make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home.

The repayment of a reverse mortgage plus interest is triggered when you die, sell your home, or when your home is no longer your primary residence for a period greater than twelve months.

The proceeds of a reverse mortgage are generally tax free, and there is no tax deduction for interest payments until the loan is paid off.

Interest rates on reverse mortgages are competitive with both fixed and adjustable rates available.

Closing costs are high but can be added into the amount of the loan. Unlike regular mortgages, most reverse mortgages aren’t rewritten regularly so someone looking for a reverse mortgage should shop carefully and take the time to evaluate all loan options before signing.

The amount you can borrow with a reverse mortgage depends on several factors including your age, type of mortgage selected, the appraised value of your home and the current interest rates.

Typically, you can expect to be able to borrow up to 55-60% and in some cases up to 75% of your home’s value with a reverse mortgage. You can also elect to receive the loan proceeds via fixed monthly cash advances for a specific time, for as long as you live in your home, a line of credit or in lump sums.

People with existing mortgages or equity loans may choose to draw a larger sum up front to pay off existing mortgages then elect a fixed amount each month or a line of credit to be drawn upon when the need arises. You can elect monthly payments and a line of credit. You can also change your payment option at any time for about $20.

You retain the title to your home, and you don’t have to make monthly payments. The loan must be repaid when the last surviving borrower dies, sells the home or no longer lives in the home as a principal residence.

Typically, a borrower can live in a nursing home or other medical facility for up to twelve consecutive months before the loan must be repaid. There are some things to be aware of when considering a reverse mortgage:

• The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount owed. The amount of debt increases as loan funds are advanced and interest accrues.
• Lenders generally charge origination fees, a mortgage insurance premium, servicing fees and other closing costs. Some of these fees can be high so you should shop around to check rates.
• Reverse mortgages reduce the equity in your home and leave fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when loan becomes due and the home is sold. The bank cannot go after your heirs to pay your reverse mortgage, however, if you or your heirs want to retain the home the loan must be paid in full even if the loan balance is greater than the value of the home.

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• You retain title to your home and are responsible for property taxes, insurance, utilities, heating, repairs, and other expenses. Your loan may become payable if you fail to pay property taxes, homeowner’s insurance or maintain the condition of your home. However, some states, Massachusetts included, offers tax deferral programs for people who can’t afford their real estate taxes.

In the last year, a handful of my clients have contacted me for my opinion regarding their suitability for a reverse mortgage. Most of these people are faced with the reality that secure pensions for most people don’t exist anymore and social security just doesn’t cover the difference. They aren’t ready to leave their homes, but the home needs a roof or other repairs.

Some of them are married and dealing with a spouse’s illness; unprepared to make decisions about leaving their home in the immediate future. A few of them have looked into senior living facilities but find them expensive.

In a few situations, the death of a spouse can trigger the loss of financial security forcing the surviving spouse to make critical decisions at a time when they are emotionally bankrupt. A reverse mortgage may not be the best answer for every scenario, but it can provide some of these people with the gift of time.

Sometimes the best legacy you can give your heirs is your financial independence, and for many people a reverse mortgage might be the lifeline they need to make that happen.

Sherri Mahoney-Battles, of Taxing Matters, specializes in income tax preparation for small businesses and individuals.

As an Enrolled Agent, licensed by the IRS, Sherri has been representing clients for over twenty-five years in cases of audit, collections, and appeals and does extensive work with non-filers.

Visit her website at www.taxingmatters.com, email Sherilyn@taxingmatters.com or call her at 508-636-9829.