Reverse Mortgages: Money from Home

by Christina Medvescek on Wed, 2006-02-01 09:41

Looking for money? For those who qualify, a reverse mortgage can supply a monthly income or cash for big expenditures without the burden of another bill to pay.

A house

A reverse mortgage is a loan against your home that doesn’t need to be paid back for as long as you live there. It can be a good option for families coping with ALS if the co-borrowers are over age 62, fully own or have substantial equity in their homes, and plan to stay in their homes for the long haul.

Certain areas may offer specialized, limited reverse mortgages that don’t require borrowers to be over 62 if they have a disability or terminal illness.

What's a reverse mortgage?

In a reverse mortgage, a lender loans you an amount based on your age and home value. No income is needed to qualify; your house is your collateral.

The lender charges interest, generally at a lower rate than a conventional mortgage. Only when the last surviving borrower moves out or dies does the loan, including interest and various fees, come due. At that point, it’s assumed the house will be sold and the loan paid off. If there’s money left, you or your heirs keep it.

A 62-year-old who fully owns a house appraised at $250,000, might qualify for a $132,700 reverse mortgage. The money can be paid out as a lump sum, a credit line (which grows over time), a monthly allotment or some combination.

Because most reverse mortgages are protected by federally sponsored mortgage insurance, borrowers never owe more than the value of their homes at the time they die or are ready to sell.

On average, people draw $800-$1,200 a month from a reverse mortgage. Some borrowers pay off their existing mortgages, eliminating a monthly payment.

Just as with a conventional mortgage, you’re still responsible for property taxes, insurance and upkeep.

Terms and costs vary. Most reverse mortgages are federally insured Home Equity Conversion Mortgages (HECM), although some private “proprietary” reverse mortgages exist for those with more expensive homes.

Who’s a good candidate?

Typically, reverse mortgage holders have health problems but have adequate caregiving in their homes and don’t want to move out, says Catherine Williams, vice president of financial literacy for Money Management International, Chicago, Ill., a consumer credit counseling agency approved by the AARP (formerly the American Association of Retired Persons).

Because up-front fees are high, running into tens of thousands of dollars, this option is best for those who intend to stay in their homes at least 12-14 years, notes Williams.

But for the right person, a reverse mortgage “has so many advantages,” she adds.

Besides monetary benefits, applicants avoid the stress of selling and moving. They’re able to stay in comfortable surrounding with their support systems in place, and reap the full benefit of any accessibility modifications they’ve made.

The downside

One obvious drawback is that you use up home equity that otherwise would go to your heirs. However, the AARP notes that many heirs are grateful their loved ones have this option.

Although Social Security Disability Income and Medicare are not affected by reverse mortgage payments, Supplemental Security Income (SSI) and Medicaid may be. In those cases, it’s important not to draw more money than is needed each month, to ensure continued benefits.

Because people who qualify for reverse mortgages often are frail or vulnerable, protections have been built in. Free counseling is required to obtain an HECM. Applicants are helped to think through other financial options and the effect on their heirs before deciding on this route.

Specialized options

A few states and communities offer deferred payment loans (DPLs) that are cheaper than HECMs. Generally borrowers must be low-income and agree to use the money for limited purposes, such as accessibility improvements. The money is paid out in a one-time lump. Similar loans may be available to pay property taxes. As with an HECM, the loan falls due when the house is sold.

Montana and Connecticut offer limited, low-cost reverse mortgage loans to people who are no longer able to function on their own.

It’s worth a check with your state, county or city housing authority or area agency on aging to see if such options exist for people with ALS in your state or community, even if you’re not over age 62.

To find out more

Reverse mortgages are extremely complicated and not every lender is knowledgeable.

The U.S. Department of Housing and Urban Development (HUD) has a list of approved lenders and counselors at www.hud.gov/buying/rvrsmort.aspx, or (800) 569-4287.

The AARP offers a free, extremely informative guide, “Home Made Money,” at www.aarp.org/money/revmort, and a reverse mortgage calculator at www.aarpmagazine.org. To order the guide or locate an AARP-approved counselor in your area, call (800) 209-8085.

National Reverse Mortgage Lenders Association publications can be obtained at www.reversemortgage.org or by calling (866) 264-4466.

Christina Medvescek
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