Cash-hungry retirees look to reverse mortgages
Despite benefits, disadvantages exist
by Robert J Bruss
If you (or someone you know) admit to being at least 62 and own your principal residence house or condominium, and if you can use more tax-free cash: read on. However, if you are just plain snoopy, unless you fit the aforementioned profile, this article isn’t for you. Now that I have aroused your curiosity, you probably wonder what I am going to reveal.
As thousands of baby boomers decide to retire every day, many suddenly realize they don’t have enough income to provide for a comfortable lifestyle. Meager Social Security income certainly isn’t the answer.
But there is an easy solution. It’s a reverse mortgage, which can provide lump sums of cash for any purpose (such as a new roof, new car, trip around the world, bill payoffs, or something frivolous), a credit line for emergencies or investments (except in Texas), or lifetime monthly income even if you live to 110.
Or, you can select any combination of the above. The best part is tax-free reverse-mortgage money never needs to be paid back as long as you live in your principal residence. Also, there is no personal liability.
Even if your home plummets in market value, the reverse-mortgage lender must honor its agreement and can never force you out of your home (as long as you live in the home and pay the property taxes and the homeowner’s insurance).
WHAT IS A SENIOR-CITIZEN REVERSE MORTGAGE? Instead of paying money to a home mortgage lender who loaned you money secured by your residence, a reverse mortgage is the exact opposite.
A reverse mortgage lender pays money to you, the homeowner. But no repayment is required until you move out for longer than 12 months, sell your house or condo, or die.
Then the reverse mortgage “matures” and the lender becomes entitled to receive the principal repayment plus accrued interest. The remaining home equity goes to you or your heirs.
Contrary to widespread misbelief, the reverse-mortgage lender does not own the residence. If your heirs want to keep the house, they can refinance the mortgage to pay off the reverse mortgage balance.
To be eligible for a tax-free reverse mortgage, you and any co-owner must be at least 62. If any co-owner is younger than 62, the residence is not eligible unless that under-62 co-owner signs a quitclaim deed conveying the title to the over-62 co-owner.
The amount of reverse-mortgage eligibility is determined by the age of the youngest co-owner and the appraised market value of the residence. The older you are, the greater your reverse-mortgage entitlement.
For this reason, homeowners in their 70s, 80s and 90s can receive the largest reverse-mortgage payments. The reason is their life expectancy is shorter than for youngster homeowners in their 60s.
NOT ALL HOMES ARE ELIGIBLE. Because a reverse mortgage is recorded like a first mortgage, there can be no other financing secured by the residence. However, if you have a small mortgage balance, such as less than 25 percent of your home’s market value, you still can probably qualify by using a reverse-mortgage lump sum to pay off the old mortgage.
Because most senior citizens own their residences free and clear, or with a small mortgage balance, this is usually not a problem. However, a large mortgage balance over 40 percent of the home’s appraised value usually makes a reverse mortgage unavailable.
Eligible homes include an owner-occupied house, condominium, or a manufactured house located on an owned lot. Ineligible properties include vacation, second and rental homes, most co-op apartments, houseboats, mobile homes, commercial properties, and farms (unless the residence is on a separate lot).
THREE MAJOR REVERSE-MORTGAGE LENDERS. Although there are a few local reverse-mortgage lenders, the three nationwide lenders are FHA (which has over 90 percent of the market), Fannie Mae and Financial Freedom Plan. FHA reverse-mortgage interest rates are tied to the Treasury Bill Index, plus a margin. But the big disadvantage, especially for owners of expensive homes, is the low FHA limits that vary by county. The Fannie Mae “Home Keeper” reverse mortgages have a higher limit, currently $417,000 (higher in Hawaii and Alaska). These loans are tied to the one-month secondary market CD adjustable-rate index. Fannie Mae is the only lender offering a reverse mortgage for home purchase so you can buy a retirement home with no monthly payments. Financial Freedom Plan reverse mortgages have no maximum limit. They are most attractive for owners of homes worth over $500,000. But this program is not available in all states.
HOW TO COMPARE REVERSE MORTGAGES. The best way to compare reverse mortgages from the three major companies is to use the Internet reverse-mortgage calculator at http://www.financialfreedom.com/. Federal law requires reverse mortgage borrowers be provided with a Total Annual Loan Cost (TALC) calculation. This TALC shows the annual effective interest rate for 1) the first two years as a percentage of the amount borrowed (usually very high), 2) at the borrower’s life expectancy age (much lower), and 3) at 40 percent beyond the borrower’s life expectancy (very reasonable). The TALC considers the up-front loan origination fees. Because these lender fees are usually substantial, senior citizen homeowners should not obtain a reverse mortgage unless they plan to stay in their home at least five years. A homeowner in poor health, or who plans to move in a few years, usually should not obtain a reverse mortgage.
WHERE TO FIND REPUTABLE REVERSE-MORTGAGE LENDERS. Although there are only three major nationwide reverse mortgage lenders, these loans are originated by local representatives. The largest reverse mortgage originators are Financial Freedom Plan, Wells Fargo Mortgage, Seattle Mortgage and GMAC. Most local banks and other home loan lenders do not offer reverse mortgages.
The easiest place to find a reputable local reverse-mortgage originator is on the Internet at http://www.reversemortgage.org/. Then click on your state for a list of local lenders and the types of reverse mortgages they offer. If you don’t have a computer, your local public library reference department will be glad to assist you.
REVERSE-MORTGAGE DISADVANTAGES. Although reverse-mortgage tax-free money sounds wonderful for senior-citizen homeowners, there are possible disadvantages. The reality is the homeowners will be borrowing on their home equity. The result can be greedy prospective heirs often discourage obtaining a reverse mortgage because the homeowners will be “spending” the heir’s inheritance.
But many potential heirs encourage their senior-citizen parents to obtain a reverse mortgage to enjoy their “golden years” with financial comfort. However, senior-citizen homeowners who are receiving SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California) should know these benefits can be reduced if the recipients do not spend their entire reverse-mortgage income each month. But Social Security and Medicare benefits are not affected by non-taxable reverse-mortgage income.