More seniors will need to access their equity

It has been estimated that over the next 18 years, 10,000 people per day will turn 62.

Today, 12 percent of our population is older than 62. As baby boomers continue to age, 40 percent of the U.S. population will be older than 62 by 2032, said Richard Glover, director of the Reverse Mortgage Division of American Fidelity Mortgage Services Inc. of Lisle.

As people grow older and retire, they confront the problem of having enough money to live on and enjoy life, and at the same time, being able to stay in their current home or a home of their choice. So much of people's accumulated wealth can be tied up in their homes, that many older homeowners end up "house rich and cash poor," Glover said.

The late Jack Kemp, secretary of Housing and Urban Development under President Ronald Reagan, actually anticipated this problem back in the 1980s and had his experts develop the Home Equity Conversion Mortgage program, which is popularly known today as a "reverse mortgage."

This program, which is guaranteed by the Federal Housing Administration and backed by HUD, gives people 62 and older access to the equity they have built up in their homes without having to make any monthly payments, Glover said.

HECM borrowers can either choose to stay in their current home, or they can use the reverse mortgage to purchase a new home if they wish, he said. The advantage of using a reverse mortgage to downsize after retirement is you don't have to worry about income or asset problems in order to qualify.

"If a 67-year-old couple bought a house in Naperville 30 years ago, for instance, and it is now worth $400,000 but has become too big for them so they want to downsize and move, they may think that they can just take $250,000 in cash from the sale and buy a new, smaller place and then have the extra $150,000 for retirement," Glover said.

"But if, instead, they use a HECM to purchase the new home, they would only have to bring $122,000 to closing, instead of $250,000, and then they will have $278,000 for retirement instead of $150,000 and they will still have no monthly payments other than their property taxes, insurance and maintenance," he said.

This becomes particularly important when you consider that if one of them passes away, the surviving spouse could have a 33-percent reduction in Social Security income.

"Worried about the disinformation they have heard about reverse mortgages, many senior citizens think that the best way to access their home equity is to get a Home Equity Line of Credit from their local bank," Glover said.

"But a HELOC can be the most dangerous instrument for a senior borrower. The bank can cancel your line of credit, and/or they can reduce the amount of available credit at any time, at the bank's discretion," he said. "Most HELOCs either have a balloon payment due in a lump sum, or after ten years there is a fully-amortized payment required until the balance is paid off over a period of time - ten to 20 years. These options make this decision less desirable. Ten years from now, it is likely that your household income will not be sufficient to support a larger payment and if you can't make the payment, you could lose your home."

With a reverse mortgage, or HECM, on the other hand, you have the ability to establish a Home Equity Line of Credit without the dangers of a typical HELOC.

"In this case, everything is guaranteed until you turn 145 years old so that you don't outlive the terms. You can get things done in reverse," Glover said.

Homeowners can access their line of credit in a number of ways, and it grows by earning interest when left unspent.

"You can get a lump sum. You can get a payment made for the remainder of the time you live in the house. You can get a 'term' payment for a period of years or you can leave the money on the line of credit," Glover said. "This annuitizes your home's equity because the available unused funds will grow at a rate equal to your interest rate.

"This little-known feature means that if you had access to $100,000 at age 62, by 72 you'd likely have access to a minimum of $200,000 (if no funds were drawn), which could then be $400,000 (at a minimum) when you turned 82, once again assuming no funds were drawn. This is all regardless of the value of your home and is backed, guaranteed and insured by HUD, through the FHA," he said.

"That credit line is always there when they need it and cannot be canceled as long as you are within the terms of the agreement, which includes occupying the home as your primary residence," Glover said.

If the homeowner chooses to receive payments, he or she can arrange to have them paid for only a certain number of years, or for the entire time the homeowner lives in the house (tenure). The nice thing, Glover said, is the homeowner can change the terms any time he or she wishes by only paying a $20 re-administration fee - instead of paying the higher fees and taking the time involved in a regular mortgage refinancing.

In addition, a misconception is that these are expensive loans, he said. There are different cost structures depending on the percentage of available funds accessed when the loan is set up and the amount of money drawn at closing. The costs can be comparable to that of a standard mortgage.

And what many homeowners and their families worry about, but often do not ask, is what happens to the equity if the homeowners pass away soon after the mortgage is set up, or, conversely, what happens if the homeowners live past 100 and the borrowed money runs out?

"If there is equity remaining in the property, the heirs sell it, pay back the money owed by the homeowners, and keep whatever is left over," Glover said. But if the homeowners are upside down on the mortgage when they pass away, neither the estate nor the heirs is on the hook for the shortfall. "FHA mortgage insurance covers any and all shortages," he said.

American Fidelity Mortgages Services is one of only a handful of HUD-approved, FHA direct-endorsed mortgage bankers based in Illinois, Glover said, which is very important. Most of the companies offering reverse mortgages are simply brokers who are less nimble and less experienced and do not specialize in setting up these kinds of scenarios, he said.

Most also do not understand the intricacies of HUD regulations, so they may make homeowners jump through unnecessary hoops, Glover said.

"We are focused on getting seniors the proper help in obtaining these excellent, but complex, mortgages. If more people realized and understood the features of these mortgages and looked past the misconceptions, a reverse mortgage would be and should be a more common aspect of retirement planning," he said.

For more information about a reverse mortgage, call American Fidelity Mortgage at (800) 365-3539.