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Eldercare funding options - Part IV
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The following is part IV in a series of V on Eldercare Funding Options
By now, most folks have heard about reverse mortgages and may have already formed their own opinion about them or for some, they don't know a thing about them and some may not care one way or the other. These opinions could have been formed through various means: someone knows someone who got a reverse mortgage, someone heard about it from a TV commercial or saw their local news station talk about them or they read about it on the internet on in their weekend Home section of their local newspaper.
Reverse mortgages are becoming popular in America. HUD's Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive free information about reverse mortgages in general by calling AARP at toll free 800.209.8085. Since your home is probably your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you!
What is a reverse mortgage?
In general, a reverse mortgage converts home equity into cash in several different ways, ranging from monthly payments to an equity line to one-time payouts -- or a combination. The amount you can borrow varies according to your age, the value of the home, current interest rates and loan fees.
But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
To be eligible, you must be over sixty-two years of age, own your home, and be living in it as your primary residence. The amount you are eligible for depends on your age, interest rates and the value of your home. Most reverse mortgages for seniors are set up so the home owner can receive monthly payments.
Advantages to reverse mortgage
• Reverse mortgages for seniors can be set up as a monthly payment, line of credit or a lump sum—whatever works best.
• No matter how the reverse mortgage is set up, the home owner does not make any monthly payments.
• No monthly payment is due from the home owner unless he or she dies, moves or sells the home. At that time, the loan is due in full, plus interest and fees.
• The home owner can receive monthly income from a reverse mortgage as long as he or she lives in the home as a primary residence. A home owner could potentially continue to receive monthly payments even after the loan balance is higher than the amount that the house is worth.
• Neither the home owner nor his or her heirs will ever owe more than the home is worth, no matter how many payments are received or how high the interest rates become.
Disadvantages to reverse mortgage
• Reverse mortgages for seniors have high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. The interest rates are adjustable.
• For seniors who depend on Medicaid or other state or federal programs, it’s important to consider if reverse mortgage payments will affect their eligibility.
Your lender and the Department of Housing and Urban Development would have a mortgage, also known as a lien, on your property. The amount of money you receive would only be a portion of your home’s value. The remaining equity would remain available to you subject to the terms of your agreement, typically the accumulation of interest & related fees over time. You retain the ability to sell, refinance, or will your property to any entity you choose at any time during the life of the loan. You also will be living in your home - if you sold the home you would give up title and relocate, or pay rent to stay in the property after the deed was transferred. At the time that you or your family does sell your home, the Reverse Mortgage balance would be paid at that time and any remaining equity would be dispersed to you and/or your heirs based on your choices.
Are reverse mortgages a good idea?
Most news stories imply they are. Reports suggest reverse mortgages can be a source of ready cash when it's needed -- similar to other investments. But, like anything that impacts your bottom line when your earning potential is limited, taking out a reverse mortgage isn't a no-brainer. That's why candidates for these mortgages should consider both the benefits and the drawbacks before jumping in. Before committing to a reverse mortgage, take a look at other services available in the community. For instance, if a senior suddenly needs a lump sum amount to replace his home's heating system, home equity should not be the first resource to consider. Many power companies offer low-cost financing for heat, air conditioning and energy conservation improvements. The National Council on Aging is a great resource for other senior programs.
Check out all of the options
George Downey, past chairman of the Massachusetts Mortgage Bankers Association, says reverse mortgages are wonderful when used properly, but shouldn't be considered a financial panacea.
"The first take-away should be that every case is different and should be determined on a case-by-case basis," Downey says. Reverse mortgages make sense for some, but for others, there may be better solutions than tapping into the equity of their home.
A factor that may muddy the waters is the influence of other family members or caretakers who push the senior toward a reverse mortgage for selfish reasons, or counsel against it because they want to inherit the property intact. He advises anyone considering a reverse mortgage to take a good hard look at what other people stand to gain from the situation -- if anything -- while considering outside advice on home equity.
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