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Our Articles
 A Reverse Mortgage Can Enhance Your Life
George is an unmarried 66-year-old man, in good physical health. He owns his home and has a small mortgage balance. He lives on a fixed income consisting of social security and a small pension. However, George is a very lonely man. While his friends play golf and go out for lunch, George spends much of his day in the house. While his friends play cards a few nights a week, George watches television and worries about money. George is becoming depressed.
Alice is also unmarried, is 68 years old and enjoys good health. She owns her own home, as well, with a small mortgage balance. Her income consists of a monthly social security check and a small pension from the same company where George worked. Alice has a very active life. She spends time with friends each day, is taking a course at the local college, goes to the theatre and is taking golf lessons. She is thrilled with her life and she can’t imagine slowing down. She is a very happy person and a pleasure to be with.
Why is Alice’s quality of life so much better than George’s? They both live on small, fixed incomes and yet, the difference in their life styles is startling.
The answer is simple. Alice took advantage of the equity in her home by converting that equity into a monthly flow of cash through a reverse mortgage. What is a reverse mortgage and how can it help enhance your life? This article will discuss the eligibility rules, the amounts of cash available, the payback and some of the advantages and disadvantages.
WHAT IS A REVERSE MORTGAGE?
As the name suggests, a reverse mortgage is the opposite of a traditional mortgage. With a reverse mortgage, a homeowner is increasing their debt and decreasing the equity in their home each month. The proceeds from a reverse mortgage are paid in one of four ways:
- Monthly payments
- A lump sum payment
- A line of credit
- A combination of the above
In addition, no repayment is required until the owner dies, sells the home or permanently moves out of the home.
The United States Department of Housing and Urban Development (HUD) offers the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM). It is the only program that is insured by the federal government. HUD collects a fee from the borrower to provide the insurance policy.
ELIGIBILITY
HECM loans are available in all 50 states, Washington, D.C., and Puerto Rico. Eligibility is as follows:
- All borrowers must be at least 62 years old and own their home.
- The property must be the borrower’s principal residence.
- The loan must be a first mortgage or used to pay off an existing mortgage.
- Generally, the home must be a single-family one-unit dwelling.
In addition, no income or credit qualifications are required of the borrower. HECM closing costs may be financed in the mortgage.
CASH AVAILABLE
The amount of cash available to eligible borrowers depends on the age of the borrower, the location of the home, the value of the home and the interest rate. Generally, the older the borrower, the more valuable the home and the lower the interest rate, the more cash would be available. The AARP Web site (www.aarp.org) offers a loan calculator that can be used to determine the amount of cash that could be available to you depending on the above factors.
REPAYMENT
As previously mentioned, repayment is not required until the home is no longer the borrower’s principal residence. Monthly payments are not required. Lenders, however, can require repayment at any time if:
- Property taxes are not paid
- The home is not properly maintained
- The home is not insured
- The borrower declares bankruptcy
The total debt to be repaid is equal to the total loan advances plus interest. As with traditional mortgages, the amount borrowed cannot be greater than the value of the home. If, at the time of repayment, the loan balance is less than the proceeds from the sale of the home, the borrower or their heirs keep the difference. However, if the proceeds from the sale are insufficient to pay the amount owed, HUD will not collect the difference from the borrower or any heirs. Instead, HUD will pay the lender the amount of the shortfall. In other words, you can never owe more than your house is worth at the time the loan is repaid. This is a huge advantage of the HECM program.
ADVANTAGES & DISADVANTAGES OF THE HECM
In addition to the previously mentioned advantage, HECM loans offer many other advantages. It allows the borrower to remain in their home and retain ownership. It generally offers the largest loan advances of any reverse mortgage. It provides additional cash flow for any purpose such as home repair, property taxes, pay-off of debt (including high-interest credit cards), vacations or any monthly living expense. Other reverse-mortgage programs offered by state or local governments are for a single purpose and are generally available to borrowers with low or moderate incomes. Most importantly, the HECM reverse mortgage gives the borrower financial independence, provides a higher standard of living, and allows the borrower to enjoy life and to remain independent for as long as possible.
With regard to disadvantages, an HECM can be very confusing as well as costly. Typically, the closing costs greatly exceed those of a traditional mortgage or other types of reverse mortgages. These costs include application fees, origination fees (points), third-party costs, mortgage insurance premiums, servicing fees and interest. Additionally, as with any type of mortgage, the legacy to the heirs is reduced due to the reduction in the equity of the home. A reverse mortgage can also affect the eligibility of certain “needs-based” public benefits such as Medicaid, supplemental social security income, Medicare benefits and others.
IS A REVERSE MORTGAGE FOR ME?
Ask yourself these questions:
- Am I house rich and cash poor?
- Is it a constant challenge living on a fixed income?
- Do I have less money to spend on home maintenance, property taxes, etc?
- Could I use a monthly flow of cash to make me more independent and help me enjoy my life?
Or, you could just ask Alice, the happy person we met at the beginning of this article.
By:
Joel M Sachs, CPA, CSA, MST
Principal
Konowitz, Kahn & Company, P.C.
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