Reverse mortgages
For most of our lives, home ownership is a long-term savings plan: we accept a higher cost of occupancy (even a higher cost for the same occupancy) in exchange for equity buildup, appreciation, and value in our retirement. The disadvantage of a house-as-savings-account is that, in general, to tap the equity, we have to sell the house.
Hard to get the lucre without dismantling the structure
Life changes such as the loss of a spouse, as well as rising health care costs, can jeopardize the finances of seniors and force some into foreclosure.
Mary Schindler, supervisor of financial and housing counseling at Catholic Charities in St. Cloud, said she sees people retiring later in life because of increasing taxes and insurance costs.
That, for many elderly, is an acceleration of mortality, so the elderly find themselves house-rich and house-locked — unable to move, unable to afford to maintain their home or their lifestyle.
With your lifestyle in jeopardy
As reported in the St. Cloud Times:
Fears about unmanageable expenses and unexpected repairs recently led 55-year-old Gerry Primus to move from his
An accident last summer put Primus on disability. He works part-time at Whitney Senior Center for supplemental income. His wife also is on a limited income. Primus said he worried their property taxes could increase due to impending road repairs.
“The mortgage was pretty low, but the taxes and fix-ups (could be high),” he said. “The times are getting rougher.”
Yet for those like Mr. Primus, as the Times further explores, there is an option that enables them to drain equity from their house and use the resulting proceeds for living expenses. Enter the reverse mortgage.
Let’s all back up and sing about the reverse mortgage
More seniors are looking to reverse mortgages to supplement their income or prevent foreclosures.
Taking equity buildup the other way
Reverse mortgages allow seniors to get some of the equity out of their home via a line of credit, monthly payments or a combination of both. The homeowners continue to reside in their home and payments are not required until:
· Both spouses die
· Both have been in a nursing home for more than a year, or
· They decide to sell the home
At that point, the balance of the reverse mortgage is due.
Trying to make it look homey
In economic terms, all insurance is a curious bet: you bet that something bad will happen to you, the insurance company bets it won’t.
I’m betting something bad will happen?
Because they make economic sense, reverse mortgages are popular, and likely to become even more so as the population ages:
Reverse mortgages increased 77% in 2006 to 76,351, compared with 2005, according to the National Reverse Mortgage Lenders Association.
For the lender, the reverse mortgage is very much an insurance bet: the lender bets that the home’s inherent equity, plus its appreciation, will exceed your cash outflow over your remaining lifespan. The lender is betting you’ll vacate before the equity drains out.
Given enough time, we can perform a complete cash-ectomy
For both reasons, reverse mortgages tend to be suitable only for the elderly:
Many lenders and financial counselors suggested reverse mortgages as an option for seniors. A person must be 62 years old and own the property to qualify for a reverse mortgage. Depending on the reverse mortgage chosen, it could be federally insured.
The counterintuitive nature of the reverse-mortgage bet, coupled with the severe hardship if the home equity too rapidly drains, increase the risk that the seniors will be fleeced by slick operators offering easy chain at usurious rates.
AARP tells seniors to be wary of predatory lenders and people pushing reverse mortgages as a way to pay for products or services.
But AARP recommends reverse mortgages instead of home equity loans for homeowners older than 62. [Handy reverse mortgage calculator here. — Ed.]
Everyone involved, such as AARP and HUD, cautions seniors not to lever their homes too far.
Too much takeout means financial imbalance
Consumer education is critical.
The Department of Housing and Urban Development requires seniors to attend counseling sessions before they sign any agreements for a reverse mortgage.
Loren Luschen, a certified consumer credit counselor with [Lutheran Social Services] Financial Counseling’s office in
Seniors need to pay off their current mortgages to obtain a reverse mortgage, Luschen said.
Naturally: the new lender needs a first lien just like the old lender did.
They also must continue to pay their taxes and insurance while a reverse mortgage is in effect.
Likewise; if insurance premiums are missed, the home’s collateral could be destroyed. And real estate taxes are the only lien that trumps the mortgage.
Sharon Schumacher, a mortgage loan officer with U.S. Bank in
In other words, the homeowner pre-funds tax and insurance escrows, and borrows those funds as well. There is probably some negative arbitrage in that the escrows will earn less than the reverse mortgage’s interest rate.
Eric Ewald, executive vice president of Mortgage Association of Minnesota, said every person’s particular circumstances must be taken into consideration before suggesting a product.
“Ultimately, reverse mortgage is something that you can’t make too many blanket statements about,” he said.
You’ll find yourself twisted up in contradictions
A reverse mortgage is a market solution; for low-income elderly, there are also social and charitable solutions.
If seniors are considering a reverse mortgage to pay for home repairs, Luschen suggested they understand that state programs exist that can help with such items in lieu of a reverse mortgage.
“You need to make this (money) last,” he said. “Depending on your other assets, once it’s gone, it’s gone.”
Entangled in financing after the equity is long gone
