About Real Estate: How older homeowners can benefit from a reverse mortgage
A reverse mortgage can help homeowners pay their bills and enjoy life more in their retirement years. The loans don#146;t have to be repaid until the owner moves out or dies.Q. My husband and I recently retired at the age of 65. Though we can get by on our Social Security checks and my husband#146;s small pension, we#146;d like some extra cash to pay off some outstanding bills and maybe do a little traveling. We have a lot of equity in our home, and a friend suggests that we take out a #147;reverse mortgage#148; to get the money we need. Can you explain how these loans work?
A. Sure. A reverse mortgage is a special type of loan that doesn#146;t require the borrower to repay the money in monthly installments. Instead, the money is typically paid back in a lump sum when the borrower eventually sells. If the homeowner dies, the money is repaid out of the borrower#146;s estate.
More than 1 million reverse mortgages have been issued in the U.S. in the past decade, and the number is expected to grow quickly in coming years as more baby boomers reach retirement age. That#146;s why I#146;m devoting this entire column to answering some common questions about these offbeat but often useful loans.
Q. Can anyone get a reverse mortgage?
A. No. You don#146;t have to be retired to get a reverse loan, but you must be at least 62 and live in the home you want to mortgage in order to apply. In addition, you must either own your home outright or be able to pay off your current loan#146;s outstanding balance with part of the proceeds from the new reverse mortgage.
Q. We don#146;t really need a single lump-sum payment. Are there other types of reverse mortgages?
A. Yes. If you don#146;t need a lump sum of cash, you can instead get a reverse mortgage that pays you a set amount of money each month based on the equity you have in your home. Or, you can set up a home equity line of credit that allows you to tap the balance of your mortgage whenever you wish #8212; say, to pay your property taxes in November and then to take a vacation in April.
Q. How much can I borrow?
A. It primarily depends on your age and the amount of equity you have in your home. The older you are, or the more equity you have, the larger the loan you can get.
Q. Where can I find a reverse-mortgage lender?
A. The best place to start is to contact the U.S. Department of Housing and Urban Development, (800) 569-4287, www.hud.gov. The agency can give you a free referral to a government-certified reverse-mortgage lender near you.
HUD doesn#146;t issue loans directly to borrowers, but instead provides federal insurance for reverse loans that are issued through thousands of government-approved banks across the nation.
There also are many reverse-mortgage lenders that aren#146;t part of HUD#146;s network. But beware: Some have been shut down after charging borrowers exorbitant interest rates and fees, taking their money and skipping town without ever providing the promised loan, or even cheating older people out of the title to their homes.
Q. Are there any drawbacks to getting one of these loans?
A. In some cases, yes. For example, upfront costs for a reverse mortgage, even for some (not all) of HUD-approved programs, can be much higher than a traditional loan. If you plan to sell within a few years, those costs easily could outweigh the benefits of getting the mortgage before you move.
Another major problem involves issues that are more emotional than financial: Many older people don#146;t like the idea of getting a reverse mortgage because they know that the money will eventually have to be paid back, with accrued interest, when they move or die. That means the estate they leave to their grown children or other heirs will be smaller than it would be if they didn#146;t borrow the money at all.
That#146;s an admirable but typically needless concern. It took me almost 10 years to persuade my elderly parents to finally take out a small reverse mortgage on their suburban home because they insisted that they wanted #147;to leave as much as possible#148; to me and my grown siblings when they passed away.
My sisters and I countered that we all had successful careers and homes of our own, so the relatively tiny amount that a reverse mortgage would cost our parents#146; eventual estate wouldn#146;t make much of a difference in our own financial future. My folks finally relented, and the modest $325 a month they received from their new reverse loan provided the cash they needed to enjoy life in retirement much more before they passed away in their mid-80s a few years ago.
Ÿ For the booklets #147;Straight Talk About Living Trusts#148; or #147;Choosing a Reverse Mortgage That#146;s Right for You,#148; send $4 for each and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960
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