Uses and Abuses of Reverse Mortgages
Last Friday as I represented clients at a real estate settlement, the title clerk on the settlement asked me what I thought of reverse mortgages. When I returned to the office, among my e-mails I found a link to a Smart Money article entitled “The Pitfalls of Reverse Mortgages.” Interestingly, it was sent to me by a mortgage professional who himself markets reverse mortgages.
As seniors look for ways to fund an uncertain future, reverse mortgages are a recurring theme. I have referred to them in columns as “the last cookie jar,” a possible tool in specific circumstances but not to be taken lightly.
As it is one of the common terms you see here now, here are some of the facts that readers need to know about reverse mortgages.
What a reverse mortgage is. When a consumer who is at least 62 owns his residence and needs additional cash, either in a lump sum, monthly payments, or a credit line, one option could be to take out a reverse mortgage. The homeowner receives cash from a lender, usually a bank, and, in exchange, gives the lender an interest in his property. He still owns his property. He does not have to move and does not have to make regular loan repayments. So far, it sounds good but homeowners should recognize that they are tapping into the equity in their home.
Qualification for a reverse mortgage. When qualifying for a reverse mortgage, all borrower co-owners must be at least 62 years old. If there is already a mortgage against the property, it must be satisfied to conclude the arrangement. To satisfy an existing mortgage with a reverse mortgage is expensive and generally should be avoided.
The maximum amount the lender will provide is based on factors including the value of the house, the age of the borrower, and current interest rates. Reverse mortgages have received more attention recently as the federal Economic Stimulus package has allowed much larger amounts to be received up to a maximum of $625,500. The old maximum depending on location could have been as low as $217,000.
Closing costs are higher than for traditional mortgages and there are continuing fees. The amount of the debt increases as the borrower-owner continues to occupy the property but the lender does not take the property while it is occupied by the borrower although there could be an exception for substantial disrepair. The owner must continue to pay his own property taxes. Since the lender recovers on its loan when the residence is sold, unoccupied, or the last borrower dies, older borrowers can take out higher loans than younger ones. Reverse mortgages can pay health care costs or be used for repairs or other purposes. They should not be used for vacations, new cars, or to pay recurring bills on a property that the borrower could not afford to keep anyway.
- Repayment of reverse mortgages. It is an event of default for a borrower to move away from the property for a year. A single homeowner who may move to assisted living or skilled care should not consider paying for his nursing home bill with a reverse mortgage since moving puts him in default. He could, instead, sell the residence and use the proceeds for his long term care. Reverse mortgages are intended for people who will stay in their current homes until they die. If anyone lives in the residence who is not a borrower, such as an adult child caring for his or her parent, then the child must know she will have to move or satisfy the loan if her parent moves to nursing care or dies. On the other hand, the lender does not make a claim for additional payment if the property is not worth enough, on sale, to satisfy the mortgage.
- Who should take out a reverse mortgage. The best candidate for a reverse mortgage is someone over age 62, single or widowed, competent and able to handle money properly, who does not have anyone dependent on him for a place to live. His home, where he intends to stay indefinitely, should have enough equity to make the loan worthwhile. He should either not have children or not have children who expect this as an inheritance.
- The downside. A reverse mortgage limits moves. It has high costs. Borrowers should be careful to use reputable professionals and not listen to schemes to use reverse mortgages to fund deferred annuities or long term care insurance.
Reverse mortgages like any strategy must fit the individual 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.