Almost two years ago I wrote a column assessing reverse mortgages and their role for an aging population. My column referenced an earlier editorial that had appeared in the New York Times titled “Aging in Place.” The Times editorial argued for greater use of reverse mortgages to handle America’s long term care crisis and asserted that “the biggest reason reverse mortgages aren’t used more widely is the lack of a high-profile, concerted partnership among government, private, and nonprofit sectors to promote them for what experts call ‘aging in place.’” In short, better marketing would cause the public to buy.
These trends must run in cycles since recently I received an e-mail from a colleague requesting my opinion concerning reverse mortgages. Shortly thereafter I happened to read not one but two recent articles by Jeffrey D. Voudrie, a respected financial advisor, columnist for SeniorJournal.com, and certified financial planner, on reverse mortgages. Mr. Voudrie expressed some of the same issues and concerns that I had raised in 2006. See his observations at www.SeniorJournal/GuardWealth.htm. He also suggested why reverse mortgages are being heavily marketed again today when the general mortgage market has crashed.
My opinions have not significantly changed from those of 2006. We refer to reverse mortgages and to equity in the home generally in our office as “the last cookie jar.” For those readers too young to remember what a cookie jar is, it is the place where family members stashed their last cash when caught short. Reverse mortgages have their place for seniors but should be approached, if at all, as a last resort and not a casual means to raise money for credit card debt or vacations.
How It Works. When a consumer who is at least 62 years old owns his residence and needs additional cash, he can apply to a lender, usually a bank, and, in exchange for transferring to the lender an interest in his property known as a reverse mortage, receive a flat sum or monthly payments or a credit line to draw on. The consumer still owns his property. He does not have to move and does not have to make regular loan repayments. However, what he is drawing upon is the equity in his house.
Qualification for a reverse mortgage. All borrower co-owners must be at least 62 years old. Any prior mortgage against the property must be satisfied although it can be satisfied from the proceeds of the loan transaction. Closing costs are higher than for traditional mortgages and may be much higher. The maximum amount of the loan is based largely on value of the house, the age of the borrower, and current interest rates. Since the lender recovers on its loan when the residence is sold, unoccupied, or the last borrower dies, the older the person taking out the reverse mortgage, the more equity he can tap into. The amount of the debt increases as the borrower continues to occupy the property but the lender does not foreclose on the property while it is occupied by the borrower although there could be an exception for substantial disrepair. Reverse mortgages might pay health care costs or be used for repairs or other purposes.
After considering the above and carefully weighing the options, a reverse mortgage can fill the needs of some elderly homeowners. As with any planning tool, it should be tailored to fit the individual’s circumstances.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.