Reverse Mortgages: The Best Way to "Eat Your Home"?

by Nora Dunn on 2 October 2007 9 comments
Photo: Papalars

Who says you can't eat your home?

A senior citizen who owns a house outright but doesn't otherwise have two pennies to rub together (or who faces a financial crisis they can't afford) does have an option for accessing the equity in their home without having to sell their house or otherwise uproot themselves unwillingly. The tool in such a scenario is called a Reverse Mortgage.

First, the nuts and bolts of reverse mortgages:

The candidate for reverse mortgages must be at least 62 years old, and must have no other mortgages outstanding on the property. Not all homes qualify either (for example many mobile homes are ineligible). There are many hoops to jump through too; The applicant must go through a Department of Housing and Urban Development (HUD) approved financial counsellor.

Once approved, the amount of the reverse mortgage depends on three factors: prevailing interest rates, the appraised value of the home, and the borrower's age (and sometimes health). The lender needs to ensure that the loan amount won't reasonably exceed the value of the home once interest and other charges are levied.

The money is then granted to the borrower either in a lump sum or monthly payments, or a combination of both. The borrower doesn't have to make any repayments, since the lender will recoup their costs (plus interest of course) when the house is sold or when the owner dies. The remainder of sale proceeds over and above the mortgage amount goes to the owner's beneficiaries, and the program is (ideally) structured such that they never end up owing more than what the house is worth.

In order to continue to qualify for the program even after the money is lent, the home must remain the principal residence of the owner.

The initial cost of a reverse mortgage can be quite high, but is usually rolled into the mortgage amount to prevent the cash outlay (which for somebody applying for a reverse mortgage is usually non-existent). Some lenders charge an insurance premium in the amount of 2% of the loan, another 2% for the origination fee, in addition to the closing costs (which include services such as legal, title searches, and appraisal fees). A $200,000 loan, for example, can cost $8,000 plus closing costs which amount to at least another few thousand. And then interest is charged for the duration of the loan on the full amount.

Interest rates are similar to those for Adjusted Rate Mortgages, and they usually change (for example semi-annually or annually) according to the current rates. Since the term of the mortgage is unknown at the outset, fixed interest rates are not often available.

The money is most often not taxable, and although the interest can be deductible, it is not so until the interest is actually paid (at the end of the term).

Pros:

  • Many seniors when faced with financial trouble don't want to consider the thought of moving from the home they've likely lived in for decades. It is a change often beyond their comprehension, and a sacrifice in their perceived quality of life. A reverse mortgage could allow them to stay in their home.

Cons:

ARTICLE CONTINUES BELOW
  • If you receive certain social benefits programs (eg: Medicaid), and you opted for a lump sum reverse mortgage amount that then sits in your bank account (or other near-cash investment), then you are all of a sudden considered to have liquid assets and your ability to qualify for the benefits is jeopardized.
  • It ain't cheap, when you calculate the fees, closing costs, insurance, and interest.
  • Although the program is structured so that the amount borrowed including interest and other costs never exceeds the value of the house, I'm not so sure. If the borrower was initially fairly young (early-mid 60's for example), and the maximum amount was borrowed as a lump sum, I see an opportunity for the perfect storm. All the borrower has to do is live longer than anybody had suspected (each year increasing the interest dollars owed), the interest rates increase dramatically, and the house values in the area drop. However the good news is that the lender (or the insurance the lender purchased) covers any additional costs. It just remains that no additional funds would be available to beneficiaries.

Conclusion:
To anybody in a situation where you (or family members) are considering a reverse mortgage, I can only offer this advice: Thoroughly do your research and examine all your options.

 

Some alternatives to reverse mortgages are:

  • Selling the home. You may discover that buying or renting another place and pocketing the extra cash isn't as traumatic as predicted, and in fact could give you a new lease on life! However it may also entail too much outlay of expenses in moving, closing costs, and sales commission.
  • Many states offer "no-cost" or "low-cost" reverse mortgages. These often don't carry the same prohibitive fees as the more conventional reverse mortgages, but the interest rates are higher.
  • Home Equity Line of Credit (HELOC). There are very few upfront costs, but interest-only payments are required and the rate of interest is a touch higher.
  • Get a loan from a family member.
  • Consider a sale-leaseback situation, where somebody buys the house, but then allows you to lease it from them. This gives you the cash needed from the sale, and the ability to remain in your home by paying rent.

For those considering moving or relocating to assisted housing, here is a link to help you determine what housing choices are available out there.


Be realistic about what your situation is, and make sure all your ducks are in a row. The reverse mortgage may be just what the doctor ordered. But don't jump to this option before exhausting all other options, as the costs can be high.

Additional Info:

AARP

National Reverse Mortgage Lenders Association (NRMLA)

HUD's info page on Reverse Mortgages

Reverse Mortgage Calculator

 

 

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Guest's picture
Yvonne

Your article is really accurate. My in-laws have the reverse mortgage. Just two weeks ago I saw their invoice, and I just couldn't believe that they were being charged over $200 a month for finance charges, plus they have other monthly fees. They get $505 a month to pocket. So this will eat up the mortgage, I'm sure!

Keep up the good work!

Guest's picture
Guest

You are an idiot

1-you can still have an outstanding mortgage balance and still get a reverse mortgage-think of the elderly widow who is 75 with an outstanding balance of $100,000. and 95% of her SS check goes to paying the mortgage every month-she MAY qualify for a RM depending on her zip code and the amount of equity in her home-this could be a godsend...and she may be able to carry on her life with some dignity

2-an experienced RM loan officer would never reccomend that a borrower take a "lump sum" unless that were planning on spending immediately for some kind of major purchase(i.e.-a car, another home, medical expense, gift to child, investment, etc), therefore they should never put that asset at risk and merely put those monies into a bank account

3-the funds awarded by virtue of the RM proceeds "earn credit line growth" by staying in the account with the lender and are NEVER at risk
because it appears on their local county records that the lender has a lien for the entire amount to protect the lender and the borrower

4-most seniors would prfer to stay in their own home that they have inhabited for the last 20-50 years and the traumatic experience of moving, selling the home, finding a new abode, are totally lost financially and emotionally by virtue of a 5-6% real estate commission, cost of moving, loss of tax and interest write off, etc

5-a senior could use the proceeds of a RM to have a visiting nurse or caregiver in order to remain in their own home

I could go on forever about your hair-brained blog here about your mis-guided views on Reverse Mortgages-you are obviously a simble man that does not know how to do his homework before your put your foot iin your mouth-you should shut your stupid mouth and do some more investigating BEFORE you hit "enter"

SHUT UP AND QUIT MIS-REPOTING THE "FACTS".....stupid

Nora Dunn's picture

I would like to respond to your comment, only because you actually bring up some good points, and some that are worth clarifying.  

"you can still have an outstanding mortgage balance and still get a reverse mortgage"

Excellent. I had read this, but also read from the same source a laundry list of qualifications that need to be met, and potential risks. But you bring up a good point nevertheless.  

 "an experienced RM loan officer would never reccomend that a borrower take a "lump sum" unless that were planning on spending immediately for some kind of major purchase"

Exactly my point. Major purchases do happen.

"the funds awarded by virtue of the RM proceeds "earn credit line growth" by staying in the account with the lender and are NEVER at risk
because it appears on their local county records that the lender has a lien for the entire amount to protect the lender and the borrower"

I never suggested that the borrowed amount is at risk. What I suggested was that after fees, annual interest, and a long life, there may not be much (if anything) left over after the house is sold. I also mentioned that there are provisions in place to prevent the borrowed amount from exceeding the value of the home (despite my personal doubts). 

"most seniors would prfer to stay in their own home that they have inhabited for the last 20-50 years and the traumatic experience of moving, selling the home, finding a new abode, are totally lost financially and emotionally"

Again, a great point. But I already said that as a pro for getting the RM.

 "a senior could use the proceeds of a RM to have a visiting nurse or caregiver in order to remain in their own home"

 Another great observation. I don't think I ever suggested that wasn't the case. However sometimes full-time care is required, and it isn't always possible to remain in the home for a variety of reasons. If you have worked with the elderly at all, you would know that. 

"you are obviously a simble man"

Actuallly, I'm a woman! And what is simble anyway? I guess I'm too simple for such advanced vocabulary! :-)

"you should shut your stupid mouth and do some more investigating BEFORE you hit "enter"

Awww....was that really necessary?

Guest's picture
Jon

What an obnoxious comment hehe. Well I've enjoyed several of your articles (and I only started reading wisebread a few weeks ago).

I think reverse mortgages should be avoided if only because of the slimy name. It's not a "reverse" "mortgage" because it's not a mortgage that the bank takes out with you! In other words, the bank isn't paying *you* interest for 30 years, of which for the first 10 years 90% of the payment goes to interest and not principal. Now that would be a good deal. But no, it's basically nothing more than a cash-out refinance to a negative amortization mortgage. And those are bad.

Andrea Karim's picture

Again, can I vote for a simple IQ test requirement before people can post comments? Wise Bread readers are almost entirely awesome, but every now and then, we get a mouth-breather like Guest, above.

It was nice of you to address his "points", Nora. He didn't deserve it, though. :)

Guest's picture
Guest

When it comes to deciding whether a Reverse Mortgage is a good investment or not, many senior homeowners don't really understand their options. For some, a reverse mortgage is a way out of debt, or a way to pay for a child's education. Others see a Reverse Mortgage as just another way for the bank to make money. The truth of the matter is, deciding whether a Reverse Mortgage is a good investment or not depends on the borrowers unique situation. This was definitely true for my aging parents, but it turns out, they made a good decision. My siblings and I had no interest in "inheriting" my parent's house and so it made sense for them to get a reverse mortgage. Once my parents pass on, the bank will get the house and all is well. In the meantime, the bank is paying them a nice monthly income which helps them pay bills and also to take a few vacations per year. They used M&T Bank's Reverse Mortgage, and the number there is: (888) 253-0712.

Guest's picture
Matt

At the end of the day, Seniors need to know ALL of their options before signing off on any given product. Many 'advisors' are just salesmen who represent their own commissionable products. Not all advisors truly have a full slate of products to offer. One alternative that Seniors should be looking into are Real Estate Equity Options.

Products such as EquityKey and REX offer Seniors an alternative to reverse mortgages where they can get cash without reducing the equity in their real estate. Instead of cutting into equity, these products allow clients to sell a portion of the future appreciation in their properties without constricting their current equity. They also don't absorb all of the fees that are associated with reverses.

While there is no 'silver bullet' solution for all seniors, it would be a good idea for seniors to look into these products to determine which is the appropriate one for their needs. Consultations should always be no-cost and no-obligation thus making it easier for Seniors to look at their options without feeling pressured.

Guest's picture
Liz Wagner

I don't know... From what I've learned on how a reverse mortgage works, they seem pretty handy. I think the problem is when people opt for the lump sum, as opposed to taking monthly payments. I definitely agree that seniors should weigh ALL of their options first, though. In my experience with my parents, however, they didn't have enough money coming in to support their lifestyle without having to leave the home they've been in since I was a little girl, so the reverse mortgage became a great idea for them.

Guest's picture
Lecia Scribner

My father in-law just got a reverse mortgage and I wanted to know what happens to the house if he passed away. Would his son be able to get the house back or do it just got to the bank. I also wanted to respong to the person saying that you shouldn't get a lump sum unless you really need it, well they gave my father one and he sure don't need it, it's just sitting in the bank is that the wrong thing for him to do any feed back I can get will surley help us thanks and GOD BLESS