Consider options before moving forward with reverse mortgage

By Gina M. Barry, Esq. Partner, Bacon & Wilson. P. C. Special to PRIME A multitude of seniors, having paid off their mortgages many years ago, currently own their homes free and clear. Some are fortunate; they have a nest egg that, along with their income (Social Security / pension), allows them to maintain their home and provide for themselves without difficulty. Some are not so fortunate and, although they own their home, do not have adequate sources of income and assets to both maintain the home and provide for their care needs. A reverse mortgage primer When a senior find himself or herself unable to afford his or her home, but has some overwhelming reason to remain there, instead of selling or downsizing, a reverse mortgage, also known as a home equity conversion mortgage (HECM), can provide access to the equity in the home without the traditional monthly payments associated with a mortgage. In order to qualify for a reverse mortgage, the borrower must be at least 62 years old and own their home. The home must be the borrower's primary residence, meaning that a rental or vacation property would not qualify. If the borrower has an existing mortgage on the property, he or she must pay off the existing loan with money received from the reverse mortgage. There are no income requirements. The borrower must undergo consumer counseling before being approved for the reverse mortgage if they are participating in the federal HECM program. Similar to a traditional loan, the property would be appraised and inspected as part of the approval process. Generally, a borrower can expect to be able to access between 50 percent and 70 percent of the appraised value of the home, but this is dependent on the home's value, location, interest rates, and the age of the younger borrower if there are co-owners. The cash and the consequences Once the loan is closed, payments from the mortgage to the borrower can be taken in a variety of ways lump sum, monthly payments, or a line of credit. Typically, unused funds in a line of credit increase thereby allowing the borrower to borrow more money over time. And, once a reverse mortgage is obtained, the borrower remains responsible for the maintenance and upkeep of the home, as well as for the taxes (with any applicable abatement for age, health, veteran status, etc.) and the insurance. A reverse mortgage must be repaid, but only when certain conditions have been met. The loan will have to be repaid when the senior dies, sells the home or permanently moves out. If the senior dies while still living in the home, the loan must be repaid upon the sale of the home or the family may choose to pay off the loan, including interest that has accrued on the amount borrowed, and keep the home. And it's not inexpensive The costs associated with obtaining a reverse mortgage are most commonly the reason why such a mortgage is not obtained. Typical closing costs on a reverse mortgage are between 6 percent and 8 percent of the home's value. The appraisal, legal fees, loan origination fees, mortgage insurance premiums, and monthly service fees are paid before any funds are disbursed to the borrower. Seniors usually turn to a reverse mortgage for a variety of reasons, including maintaining their quality of life after retirement, paying for prescription drugs or needed medical supplies, and paying for administrative, personal or nursing services. Be sure this mortgage is the right fit If there are other financial resources that can be used to pay the senior's ongoing expenses, the use of those funds should be seriously considered prior to obtaining a reverse mortgage. If monthly payments on a home equity loan or line of credit are affordable, such a loan may be more beneficial, as those instruments are less costly than a reverse mortgage. Further, many state and local governments offer low-cost loans for paying property taxes or making home repairs. When other options exist, a reverse mortgage might not be the best option. When a senior owns his or her home, but does not have the other assets necessary to maintain his or her lifestyle and care needs, a reverse mortgage can be an invaluable device. Ultimately, seniors who find themselves in this situation are the ones best suited for moving forward with a reverse mortgage. Gina M. Barry is a Partner with the law firm of Bacon Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of Estate and Asset Protection Planning, Probate Administration and Litigation, Guardianships, Conservatorships and Residential Real Estate. Gina may be reached at (413) 781-0560 or gbarry@baconwilson.com.