Reverse Mortgages

Many seniors facing retirement share a common financial problem; they are house rich and cash poor.  A senior’s home is typically their biggest financial asset and is close to being paid off if it hasn’t already been paid off entirely.  Their dilemma is that cash is needed to live comfortably at a time when their income is limited and would impact their ability to qualify for almost any type of loan.  However if you are age 62 or older, the solution may be a reverse mortgage.  Income is not needed to qualify for a reverse mortgage and monthly payments are not required to repay the loan either.  With the kind of loan one uses to purchase a home, referred to as a “forward mortgage”, a borrower’s income is used to qualify for and to repay the debt as the equity position in their home grows.  With a “reverse mortgage” income is not a qualifying factor and instead the lender is sending cash payments to you, therefore the equity in your home is actually declining and your total debt rising.  As the lender sends you each monthly payment, your equity position will shrink unless the appreciation in your home’s value outstrips the proportional increase in reverse mortgage debt.

The interest on a reverse mortgage is not deductible on your federal tax return until that time when the loan is paid off, either partially or in full.  However the cash payments you receive are in turn tax free to you. You also retain title and ownership to the home and therefore are still responsible for making payments of your property taxes as well as maintaining your homeowner’s insurance policy.  A reverse mortgage is referred to as a non-recourse loan which means the maximum liability is capped and that neither you nor your estate can be held liable to repay more than the actual value of the home even if the loan balance were to eventually exceed the home’s value.  A mortgage insurance premium can be included with the loan to insure that you receive the promised cash advances on the home and that you will not be required to repay the loan for as long as you reside in it as your primary residence.

Most reverse mortgages have variable rates, tying them to a financial index which reduces the lender’s risk and keeps the rate tied to current market conditions.  However fixed rates are available but less common.  Just as with the “forward” or purchase type mortgage, a reverse mortgage does allow for a three day right of rescission to void or completely cancel the loan (even after the loan documents have been signed) for any reason.  In the event that the loan is rescinded, all monies paid in advance to the lender by a reverse mortgage applicant must be refunded to the applicant in full.  Note the rescission notice of a potential borrower or applicant must be delivered in writing to the  lender before the three day rescission period is up.  Be sure to obtain a Total Annual Loan Cost (TALC) which shows the estimated annual average cost of the reverse mortgage and includes an itemization of closing costs.  This is also a useful tool for comparing several reverse mortgage options.

There are a variety of reverse mortgages to choose from. 
The three basic types are as follows:

1) Proprietary Reverse Mortgages

2) Government-Sponsored Reverse Mortgages

3) Federally-Insured Reverse Mortgages

There are also choices available as to how you might like to receive payments from a reverse mortgage.  You can select the option that best suits your needs:  1) regular monthly payments. 2) one lump sum of cash up front. 3) an account which you can draw on much like a line of credit to be available to you and used at your discretion. 4) a combination of the aforementioned.

The negatives or drawbacks of a reverse mortgage are that this loan will deplete the equity in your home and will reduce or eliminate an important part of your estate which you may have intended to pass along to your heirs.  The interest rates and fees on these loans are high and some of the loans require repayment within a defined time frame that may not work with your time table.  Other options to consider before applying for a reverse mortgage might be selling your home and moving to a more affordable, less expensive property or area.  This option would allow you to take advantage of the current tax laws which provide for a capital gains tax exclusion in the ample amount of $250,000 and $500,000 respectively for qualifying single and married individuals.  Another possibility is to design a reverse-style mortgage within your immediate or extended family.  If you have family members who are in a financial position to provide you with a stream of monthly payments or cash flow, you can in turn offer them ownership of your home in exchange.

For more information refer to the following links:

• The American Association of Retired Persons (AARP):  

             www.aarp.org/money/revmort

• The Federal Trade Commission (FTC); Consumer Facts:

            www.ftc.gov/bcp/conline/pubs/homes/rms.htm

• National Center for Home Equity Conversion: www.reverse.org

• The National Reverse Mortgage Lenders Association: www.reversemortgage.com

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