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The skinny on reverse mortgages

Chris Farrell Nov 1, 2010

Question: I am inquiring about reverse mortgages on behalf of my aunt who is a widow 85 years old. She lives in a home with a mortgage that is between 8 – 10 years old.

Question #1: What is a reverse mortgage?

Question #2: What information do I need from my aunt in order to determine if a reverse mortgage would be of benefit to her? Her only source of income is her husband’s social security pension. She is not well and requires additional support. She lives in Illinois. Charleen, Culver City, CA

Answer: The main advantage of a reverse mortgage is that a homeowner gets an income from their home equity without having to sell the home or take out a second mortgage.

I’m not a big fan of reverse mortgages. I’m glad the product exists and it has improved over the years. A reverse mortgage could be a good solution for those who are asset-rich, but need an income. If you like the idea of staying in your own home–and are struggling to make ends meet–reverse mortgages are well worth checking out. But the operative phrase is “be careful.” For many people it should be viewed as a last resort.

By the way, a reverse mortgage usually only makes financial sense if the home is owned outright or if there is very little left on the mortgage. You’ll need to learn more, but it may not be a practical move for your aunt. But here are some basics of the product.

What is a reverse mortgage? It allows anyone 62 or older to turn their home equity into cash while continuing to live in the home. A homeowner makes no repayment until the house is sold (typically after death). Money can be taken as a lump sum, a line of credit or on a regular payment schedule. There are no restrictions on how the money is used. It can go for everything from medical bills to home improvements to daily expenses. The homeowner is responsible for the taxes and insurance on the property.

There are drawbacks to a reverse mortgage. These are complex loans. For instance, how much you can get from the reverse mortgage depends not only on regulatory limits, but on three other factors as well: The home’s value, average mortgage interest rates, and your age. There are fees that come with establishing a reverse mortgage. And once you have executed a reverse mortgage you’re really left with practically little alternative to staying in the home even if other things have changed later on, say, the only helpful, caring child moves to another city or the house isn’t suited for someone with disabilities.

What’s more, the money that comes from a reverse mortgage can be counted as income or an asset that restricts eligibility to some government programs, too.

The most popular reverse mortgage is a Home Equity Conversion Mortgages (HECM) run by the federal government’s Housing and Urban Development (HUD). To qualify for a reverse mortgage, the borrower must meet with a HUD-approved housing counselor. The requirement is a good one. It was put in because it’s an easy product to misunderstand at best and abuse at worst. Problem is, news stories showed that the consulting sessions were too often poorly run and the quality of advice varied. In September of this year HUD further stiffened the requirements for qualification.

I’ve only touched the surface of the reverse mortgage product. The AARP has a good overview that goes into much more detail. HUD also has a section of its website devoted to reverse mortgages.

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