The pros and cons of choosing a reverse mortgage

PRIME – February 2013 By Gina M. Barry Bacon Wilson P.C. A multitude of seniors, having paid off their mortgages many years ago, currently own their homes free and clear of any debt. Some are fortunate and they have a nest egg that, along with their income (Social Security and/or pension), allows them to maintain their home and provide for themselves without difficulty. Some are not so fortunate, and although they own their home, they do not have adequate sources of income and other assets to maintain the home as well as provide for their care needs. When a senior finds him or herself unable to afford living at 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, and not a rental or vacation property. 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 to obtain a reverse mortgage. Further, if the homeowner is participating in the federal HECM program, the borrower must undergo consumer counseling before being approved for the reverse mortgage. Similar to a traditional loan, the property is appraised and inspected as part of the approval process. Generally, a borrower can expect to be able to access between 50 and 70 percent of the appraised value of the home, but the amount that can be accessed is dependent on the home's value, location, interest rates, and the age of the younger borrower, if there are co-owners. Once the loan is closed, payments from the mortgage to the borrower can be taken in a variety of ways including lump sum, monthly payments or a line of credit. Typically, the line of credit increases as the homeowner ages, allowing him or her to borrow more money over time. Once a reverse mortgage is secured, the borrower remains responsible for the maintenance and upkeep of the home, as well as for the real estate taxes (with any applicable abatement for age, health, veteran status, etc.) and the property insurance. A reverse mortgage must be repaid when the senior sells the home, permanently moves out or dies. With respect to permanently moving out of the home, there is typically a period of time allowed for absence from the property, such as for admission to a hospital or rehabilitation center that is not permanent, that does not trigger repayment. If the senior dies while still living in the home, the loan must be repaid upon the sale of the home. The family may also choose to pay off the loan, including interest that has accrued on the amount borrowed, and keep the home. There are costs associated with obtaining a reverse mortgage, and this is often why seniors don't seek this option. Although some loan programs may have lower costs, typical closing costs on a reverse mortgage are between 6 and 8 percent of the home's value. In addition, appraisal fees, legal fees, loan origination fees, mortgage insurance premiums and monthly service fees all must be paid before any funds are disbursed to the borrower. Seniors typically turn to a reverse mortgage to help maintain their quality of life after retirement, to pay for prescription drugs or needed medical supplies or to pay for administrative, personal or nursing services. If there are other financial resources available to pay for these ongoing expenses, using those funds should be considered before seeking a reverse mortgage. However, if the monthly payments on a home equity loan or line of credit are affordable, such a loan may be more beneficial. Further, many state and local governments offer low-cost loans for paying property taxes or making home repairs. When other options such as these exist, a reverse mortgage might not be the best option. Nonetheless, a reverse mortgage can allow a senior to meet the goal of remaining in the home instead of moving to a smaller home or to an assisted living facility or nursing home. 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 option. Ultimately, seniors who find themselves in this situation should discuss all of their options before 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. She may be reached at 413-781-0560 or gbarry@baconwilson.com.