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QUEST

Ask Julie

reverse Mortgage

Dear Julie, My parents, ages 67 and 69, have
been approached by someone who is recommending that they take a reverse mortgage on their home. They have turned to me for advice but, quite frankly, I am not sure what to tell them. Please help.

You have indeed touched on a subject of great interest to our aging population.
A reverse mortgage is a special type of home loan that allows homeowners to convert part of the equity in their house into cash. But, unlike a traditional mortgage, which must be repaid over the years, the loan balance of a reverse mortgage will accrue interest over the years “behind the scenes” and be paid off from the equity of the home once the owner no longer uses the home as his or her primary residence. Basically, it is a way to cash in on your home equity without having to make payments on the loan as long as you occupy the property. Once the property is sold, the loan is settled and any remaining equity goes to the owner or heirs.
The homeowner can choose to receive the cash from a reverse mortgage in several different ways, ranging from monthly checks, to an equity line of credit or one-time payouts­—or a combination of these. The amount received depends on the age of the homeowner(s), the value of the home, current interest rates and loans fees—which can be substantially higher than on a traditional loan. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get. These payments are generally tax-free. Property taxes and insurance remain the responsibility of the homeowner.
To be eligible for a reverse mortgage, the borrower must be at least 62 years old, own the home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan. The owner must live in the home. There are no income restrictions to qualify and no change of title is required.
There are three types of reverse
mortgages:
• Single-purpose: These loans are offered by some state and local government agencies and nonprofit organizations. They generally have very low costs. But they are not available everywhere, and they can only be used for one specific purpose, such as paying for home repairs, improvement, or property taxes. In most cases, you can qualify for these loans only if your income is low or moderate.
• HECMs­: These Home Equity Conversion Mortgages are federally insured. They are backed by the U.S. Department of Housing and Urban Development (HUD). Since they tend to be more costly than others, these loans may not be suitable for owners who are planning a short stay in their homes. They are widely available and can be used for any purpose. Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. This is a very important step for any reverse mortgage candidate because part of this counseling will include other government or nonprofit programs that are available in your area and for which the owner may qualify.
•Proprietary: These mortgages are offered by private companies. They also have higher fees and the proceeds may be used for any purpose.
I would strongly suggest that you research all your parents’ options. Make sure you inquire about the effect of a long absence from the home on their loan in your state (for example, a temporary but extended stay in a nursing home) as well as how the income from the loan would impact their Medicaid eligibility, if applicable.

for more information

Federal Trade Commission:
www.ftc.gov/bcp/conline/pubs/homes/rms.shtm
U.S. Department of Housing and
Urban Development:
www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm
National Reverse Mortgage Lenders
Association (NRMLA):
http://reversemortgage.org

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