Op-Ed/Local Columns
The word on reverse mortgages
By Nicole Waldron
Editor's note: This column represents the first in a new monthly series on an array of issues of importance to area seniors. Each entry will be prepared by residents, nonprofit organizations and specialists in a variety of fields exclusively for readers of The Independent.Chances are good that you've at least heard of a reverse mortgage, even if you're not really sure what it is or how it works. Feel somewhat skeptical when someone says "reverse mortgage?" I did, too, when I began researching them for my parents several years ago. However, what I found was so reassuring that my parents went on to enjoy benefits of a reverse mortgage, and I went on to become a specialist in the field. Today I'd like to go over the basics of reverse mortgages and address some of the most common myths about them.
A reverse mortgage is a loan available only to homeowners 62 or over that allows them to convert the equity they have in their home into supplementary income. Reverse mortgages can be used for anything; travel, gifts, home care, property taxes, long-term care insurance, paying off debt, creating a nest egg or a combination of all of these. There are no income, health or credit checks to apply for a reverse mortgage, and no payments are required as long as one of the borrowers uses the home as a primary residence. The loan becomes due only when the last borrower no longer lives in the house - usually because of a decision to sell the home, or a move to an assisted living facility for 12 consecutive months with no possibility of a return to independent living or because of death.
In the case of moving to an assisted living facility or death, the heirs then decide how they would like to pay off the reverse mortgage. Possibilities include selling the home and paying off the reverse mortgage while keeping the remainder of the profit; paying the reverse mortgage out of other inherited assets such as bank accounts and investments and keeping the house, or they can take out a regular mortgage to pay the reverse mortgage and keep the house.
This is a good place to bring up Myth #1: with a reverse mortgage, a bank ends up owning the house. Nope. The borrowers always retain sole title to and control of their home, and are able to sell it whenever they want, and will it to whomever they want.
Myth #2 is that a home has to be completely paid off before obtaining a reverse mortgage. On the contrary, many seniors do a reverse mortgage simply to pay off their existing mortgage and free themselves permanently from that monthly payment.
Myth #3 is that reverse mortgage funds are doled out to you monthly. Although a regular monthly payment is certainly an option, most people are choosing to take a lump sum at closing that pays off whatever needs paying off, and leaving the rest in a line of credit. That way, interest only accrues on what is actually used, and the amount in the line of credit continues to grow, currently at approximately 7 percent.
How much borrowers are eligible for is dependent on four things: age, appraised value of the home, current interest rate and the county lending limit.
The majority of reverse mortgages in the country are government insured, and the U.S. government has determined a lending limit for each county in each state. In York county, this limit is $256,025. However, there are private reverse mortgages that do not have a lending limit that were created specifically for higher-valued homes.
In general, the older you are, the higher your home is valued and the lower the interest rate, the more you'll get. Using the interest rate on Saturday, Jan. 27, a couple who are both 70 with a home in Cape Neddick that appraises at $380,000 would be eligible for approximately $142,000, after closing costs.
What's the downside? Well, since the borrowers never make a payment, a reverse mortgage balance grows, rather than decreases, over time. However, the home is also appreciating with time, and substantial equity often remains. Also, while many of the costs associated with obtaining a reverse mortgage are the same as with a regular mortgage or refinance, the government-insured reverse mortgage requires a one time insurance premium payment that can make the closing costs seem high. This payment makes certain that, in the unlikely event that the lender declares bankruptcy, the reverse mortgage will continue to be paid. All costs, however, can be rolled into the reverse mortgage so that the borrower does not have to pay anything out of pocket.
In the right situation, a reverse mortgage can change the lives of older Americans. It can mean the difference between being able to afford the home care services you need to stay home and having to move to assisted living. It can mean the difference between fulfilling a long-held dream to visit Australia and having it remain a dream. Ultimately, it can mean the difference between worrying about finances and not having to.
For adult children of seniors, myself included, it means knowing that your parents are secure in their later years, and that means a lot.
Nicole Waldron is a reverse mortgage specialist who lives and works in York.
