Reverse Mortgages –The Last Cookie Jar?
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.
- Repayment of reverse mortgages. When borrowers move from the property, the loan is in default. Reverse mortgages should not be expected to pay a single or widowed person’s care in a nursing home or assisted living because the fact that the person moved calls the loan. An alternative would be instead to sell the residence and use the proceeds for long term care. Reverse mortgages are intended for people who will remain in their current homes until they die.
- Who might take out a reverse mortgage. The best candidate for a reverse mortgage is an elderly, single or widowed person who is competent, willing and able to continue to live in the current home, and needs funds to sustain independent living.
- The downside. A reverse mortgage can limit options such as moving. Where it is accessed once, as for example, for a husband’s medical costs and husband dies, his wife might not only be cash poor but have depleted equity in the house on his death as well. The mortgage has high costs. If ultimately there is a move to a long term care facility, the house would be sold or payment would have to be made to satisfy the loan.
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.
About the Author Janet Colliton
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.