by Gary R. Crum
How to Get Cash for Retirement
Is a reverse mortgage right for you?
Dorothy Rogers helped her husband, John, build their Hampton, N.H., home in 1955.
About two decades later, Mr. Rogers died - just 20 days short of retirement. And she came close to losing the place.
"I lost John, his insurance money, and most of his pension," Mrs. Rogers recalls. "I received a little of his pension, but it lasted only about one year." Social Security kept her barely afloat, but it was outpaced by inflation.
It's a relatively common problem among senior citizens: Although they own their homes, they don't have enough money to handle unexpected expenses and increasing property taxes.
The answer for Rogers - and for a small but increasing number of seniors: a reverse mortgage.
These loans pay the homeowner, in a monthly payment or one lump sum, using the equity in their house as a source of funds. The loan does not have to be repaid until the house is vacated.
FHA Home Equity Conversion Mortgage
Rogers decided on a $77,000 FHA Home Equity Conversion Mortgage. She now receives more than $600 a month in extra income. Such arrangements are beginning to get wider attention.
"There is not a huge demand, only something like 70,000 of these loans have been made in the past 10 years," said Phil Storms, a certified financial planner in Denver, Co. "Many seniors have a strong emotional commitment to leave something to their kids. And the house is usually their biggest asset."
Tom Atwell is senior business manager at Fannie Mae, the company that purchases virtually all of the reverse mortgages that are initiated.
"HECMs offer some distinct advantages over normal home-equity loans," says Atwell. "With a reverse mortgage, no payments have to be made as long as the borrowers remain in the home. Home-equity loans require monthly payments."
In addition to being a resource for medical expenses, the proceeds from a reverse mortgage can be used for any purpose, such as education, paying off debts, enjoying a better lifestyle, or even investing.
Best age for a reverse mortgage
Homeowners must be at least 62 years old, with little or no mortgage on their primary residence to be eligible for a reverse mortgage. But Mr. Storms suggests waiting until at least age 70.
"These are not very good for the average 62-year-old, because the long remaining life expectancy reduces the funds available. People between 70 and 80 have a different situation and must deal with long-term care issues."
Remaining life expectancy is a critical part of the formula for determining the amount of money that will be lent to a reverse-mortgage borrower.
The loan must be repaid from the sale or refinancing of the house when the surviving spouse is gone. So the loan amount is designed to be less than the value of the house.
"Homeowners may take a 'tenure loan,' which will make payments to them until they vacate the property," Atwell explains. " A line-of-credit loan is also available, where the borrower may draw on the funds when they are needed."
About 75 percent of the loans handled by Fannie Mae have this feature, he says. And many seniors take a combination of a line of credit and a tenure loan.
"The proceeds from a Home Equity Conversion Loan are not taxable. And the funds may be gifted to children and grandchildren if the homeowner doesn't need the proceeds," says Storms. "The survivors have a choice of paying off the loan, refinancing the loan, or walking away from the house."
Disadvantages of Reverse Mortgages
There are disadvantages. "Seniors considering a HECM loan should be aware of the up-front fees.They can be fairly hefty," says Storms.
Normal mortgage closing costs apply to these loans, and can amount to 5 to 7 percent of the total loan amount. Most of these loans are insured by the Federal Housing Authority (FHA) and include an up-front fee in addition to an annual premium.
The cost of a reverse mortgage means borrowers should plan to remain in the house for several years if they are going to incur these expenses.
"Everybody should look and evaluate these options as they grow older. This should be a logical, rather than emotional, decision," counsels Storms.
"We like to give as much information as we can, so consumers can make their own decisions," says Mr. Atwell.
Consider an alternative loan from LendingTree instead of a reverse mortgage.
Reverse Mortgage - Is it for you?