The expression ‘house-poor” has become much more prevalent in recent years as long-time homeowners find themselves owning a home worth hundreds of thousands of dollars, coupled with a very limited income. To address this situation, the ‘reverse mortgage’ concept has become increasingly popular in recent years. This new subsection of the CIN is designed to explain reverse mortgages, including their advantages and disadvantages:

WHAT IS IT?

A reverse mortgage permits older homeowners who are 62 or older to convert part of the equity in their homes into tax-free income without selling their home, giving up title, or taking on a new monthly mortgage payment. Instead of making monthly payments to a lender, as with a regular mortgage, the lender makes payments back to the homeowner. The reverse mortgage name is appropriate since the payment stream is essentially “reversed.” The homeowner is then able to use the proceeds to cover day to day expenses and other costs which they might otherwise have difficulty paying on their limited income.

HOW DOES IT WORK?

The homeowner taps into his or her equity so they can receive a monthly payment to help cover expenses. The amount of money a homeowner is eligible to receive depends on their age, the appraised home value, interest rates and the area lending limit. In most cases, older homeowners with more valuable homes will qualify for higher payments.

Single-family homes, 2-4 unit properties, condominiums, and townhouses also qualify for a reverse mortgage. Proceeds from a reverse mortgage can be received as a lump sum, fixed monthly payments either for a specific term or as long as you live in the home, as a line of credit, or a combination of these options. The funds can be used for anything, including day to day expenses, health care costs, home repair, and/or vacations.

HOW IS INTEREST CHARGED?

Interest is imposed only on the proceeds received. Most reverse mortgages carry variable interest rates linked to an industry recognized index, such as the 1-Yr. Treasury Bill, plus one to three percentage points.

CAN IT BE COMBINED WITH A REGULAR MORTGAGE?

No. However, if money is still owed on a standard mortgage, a homeowner can qualify for a reverse mortgage, providing it is structured in a first lien position, so any existing indebtedness must be paid off. The existing mortgage can be satisfied with money from a reverse mortgage, savings, or even financial assistance from a family member or friend.

HOW DOES A REVERSE MORTGAGE IMPACT SOCIAL SECURITY AND MEDICARE?

Social Security or Medicare benefits are not impacted by a reverse mortgage. However, for a homeowner on Medicaid, reverse mortgage proceeds must be used immediately. Funds that are retained would count as an asset and could impact Medicaid eligibility.

WHEN DOES THE REVERSE MORTGAGE GET PAID BACK?

As long as the reverse mortgage remains outstanding, the homeowner makes no monthly payments. The mortgage is paid back when the homeowner ceases to occupy the home as a principal residence, whether due to death, sale, or permanent relocation. The amount owed can never exceed the value of the home. If sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to the homeowner or their estate.

ARE THERE INSTANCES WHERE A REVERSE MORTGAGE DOESN’T MAKE SENSE?

Due to their structure, reverse mortgages generate significant upfront costs. If a homeowner intends to leave their home within 2-3 years, a reverse mortgage is not recommended. Other less expensive options to consider in such instances would be home equity loans, no-interest loans or grants. In addition, if a homeowner plans to leave his or her home to their children, reverse mortgages are not recommended since the home is often sold to pay back the reverse mortgage.

IS COUNSELING AVAILABLE?

Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone. The reverse mortgage concept, while useful and popular, carries new techniques and is not for everyone. As government and financial institutions made the program available, counseling was one of the most important consumer protections built into the program. It requires an independent third-party to make sure a homeowner understands the program, and reviews alternative options, before applying for a reverse mortgage. Counseling may be obtained from a local HUD-approved counseling agency, or from a national counseling agency, such as AARP (800-209-8085).

CIN RECOMMENDED WEB SITES FOR ADDITIONAL INFORMATION:

AARP: REVERSE MORTGAGES: http://www.aarp.org/money/revmort/

WHAT IS A REVERSE MORTGAGE:  http://www.reversemortgageprofessionals.com/

NRMLA-ALL ABOUT REVERSE MORGAGES: http://www.reversemortgage.org/