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).
****
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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