To reverse or not?

Published 4:44 pm Wednesday, October 6, 2010

By Charlie Passut

There’s more to reverse mortgages than payments

Whether the situation applies to you or to your parents, homeowners aged 62 and older, who expect to live in their current home for several years but also need extra money every month, have an option available to them through the federal government: reverse mortgages.

“It’s an opportunity for older people on a fixed income,” said Drew Edwards, a mortgage banker with EVB Mortgage in Courtland, Va. “It’s still a mortgage on a house, but instead of making payments, you’re getting money back. You don’t have to deal with credit scores or qualify with income. The most important thing is how much equity is in the house.”

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To qualify for this type of loan — coined as “reverse,” because the lender pays the homeowner — the mortgager must have the subject home as the primary residence.

There are two types of reverse mortgages available, proprietary reverse mortgages and Home Equity Conversion Mortgages, or HECM. The former are offered through some banks and credit unions for high-value homes, but the latter are offered through the U.S. Department of Housing and Urban Development and are insured through the Federal Housing Administration.

About 95 percent of reverse mortgages are HECM loans.

According to the National Council on Aging, the money reverse mortgagers receive is tax-free and can be used for any purpose, including buying another home, which is sometimes the choice of persons looking to downsize or move closer to family members.

Older borrowers also are eligible to receive more money, because lenders include life expectancy in calculating loan payments.

Edwards said reverse mortgages seem to be gaining in popularity lately.

“I have heard a lot more about them in the last six or eight months,” he said. “Two years ago, maybe one or two people a year would ask me about them. But like everything else, it runs in spells. I’ve had a lot more people ask me about them.”

According to the National Council on Aging, there are several advantages to getting a reverse mortgage.

First, the person taking out a reverse mortgage — or his heirs — will never owe more than the value of the home if the property is sold to repay the loan, even if the value of the home declines. If a person’s heirs decide to keep the home, they must pay the full balance of the loan.

Second, the reverse mortgager will continue to own the home and can’t be forced to leave, provided the home is maintained and property taxes and homeowner’s insurance are paid.

Reverse mortgagers also can get their loan funds though a variety of options, including a lump sum or a line of credit. The line of credit on HECM loans may increase over time, depending on interest rates.

Finally, if there is an existing mortgage on the home, reverse mortgage proceeds can be used to pay off that loan. This makes more money available to the reverse mortgager, because there is no need to make payments to the regular mortgage.

However, the NCOA cautioned that there are some disadvantages to getting a reverse mortgage.

Closing costs for a reverse mortgage are rarely folded into the interest rate, although they can be financed into the loan itself. Because of this, the costs can be high; they could range from about $6,000 for a $100,000 home to more than $16,000 for a $400,000 home.

Another thing to consider is that a reverse mortgager could, over time, wind up spending a large part of his home’s equity, thereby leaving less of an inheritance someday to family members.

Also, reverse mortgagers who stay in an assisted living facility or nursing home for more than a year will be required to pay off the full balance of the loan.

“A lot of people don’t understand reverse mortgages, and most companies don’t do them,” Edwards said. “I don’t ever advise anyone to do a mortgage over the Internet, or to talk to somebody in California about getting a reverse mortgage when you’re sitting in small-town Virginia.

“You’re working with older people, so the trust issue has got to be there.”