Reverse mortgages turn equity into cash flow

Studies have shown that for many seniors, the worst fear is “running out of money.” The reverse mortgage allows senior homeowners to convert a portion of their equity into tax-free cash flow.

This specialty mortgage product is being utilized by a growing number of homeowners who find themselves house rich and cash poor. In order to make an informed decision, consumers must take the time to evaluate whether this product is right for them.

A growing number of older homeowners are having serious financial issues. They may have a lot of equity tied up in their homes but are so cash poor that they are behind in their monthly living costs. Many are too proud to ask their children for help, and they do not want to sell the family home and move.

General guidelines

To qualify for a reverse mortgage, the homeowner must:

• Be age 62 or older (if a couple, both parties must be at least 62).

• Occupy the property as primary residence.

• Have equity in the home.

Borrowers can choose several different payment options to receive the equity in their homes. Seniors can receive consistent monthly amounts, a lump sum or a line of credit to be used as necessary. The amount available to seniors is based on the age of the youngest borrower, the amount of the equity and the current interest rate.

Reverse-mortgage borrowers should expect most of the traditional costs associated with any mortgage. With a reverse mortgage, these costs become part of the proceeds from the equity, so there are no out-of-pocket expenses.

Advantages

The biggest advantage for most seniors is the advantage of staying in their own home while supplementing their cash flow.

Some additional advantages:

• The homeowner retains title and ownership to the home. A common misconception is the belief that the property becomes the lender’s upon receiving a reverse mortgage.

• The loan does not have to be repaid as long as the home remains the borrower’s primary residence. When the property is sold, only the outstanding balance is paid to the lender; any remaining equity becomes part of the estate and passes to the heirs.

• The borrowers can never owe more than the value of the home no matter how long they live in the home.

• The tax-free proceeds from the reverse mortgage can be used for any purpose the homeowner chooses. Some common uses include medical expenses, home repairs, repayment of outstanding credit card balances or gifts to children.

Key considerations

For most seniors, the greatest security of all comes from a home that is owned free and clear. To consider using this security as the basis for a loan can be overwhelming. Seeking qualified counsel and careful consideration should be a part of the decision- making process. Consulting with a financial adviser, family members and a qualified loan officer should be starting points.

For senior homeowners, reverse mortgages offer another tool to assure that they can meet their financial needs with dignity and continue to remain independent.

Reverse Mortgage Overview

In 1989, Congress authorized the Department of Housing and Urban Development to establish the first reverse mortgage, called a home equity conversion mortgage. According to HUD statistics, the number of these HECM loans taken in 1990 was 157. The number in 2005 was 43,000.

Brent Woody is vice president and mortgage loan originator with The Signature Bank. He can be reached at brent_woody@signaturebank.com.