By Deborah Jeanne Sergeant
Why should you consider a reverse mortgage? Officially known as the home equity conversion mortgage, the FHA-insured program allows people who qualify to receive monthly payments that draw from equity in their homes to use for ongoing or periodic expenses. For some people, this can offer many advantages.
Local experts weighed in on the pros of reverse mortgage.
Dave Walsh, principal at Homechex in Rochester, said that a reverse mortgage can “generate cash for whatever the homeowner may need with no repayment as long as they live in their home.”
He added that providing both the husband and wife take part in the transaction, the repayment isn’t triggered if one goes to live in a nursing home. (If both leave permanently, the repayment must take place.)
“It’s one of the greater advantages of the program,” Walsh said. “For people who want to stay in their home and want some cash, it’s a terrific program.”
The federally-insured program works for snowbirds as well, as long as their reverse mortgage property remains their primary residence as represented by their driver’s license and other indicators.
If the couple decides to move, they can sell the house to pay off the reverse mortgage and keep any money above the loan amount. If they remain in the house until they die, their heirs can do the same.
“Or, the heirs could keep the house if they get their own financing,” Walsh said. “They can’t assume the reverse mortgage.”
The homeowner must pay off any existing mortgage or home equity loan as part of the reverse mortgage closing, which eliminates the monthly payment.
Many people believe that a reverse mortgage endangers home ownership. However, Walsh said that’s it’s actually more likely with a standard mortgage or equity line of credit, as such loans require a monthly repayment.
Some home owners fear that they could end up owing more than the value of the home if they continue to reside in it for an extended period of time. Walsh said that the FHA guarantees that the required repayment will never exceed the value of the home, therefore the owners or the heirs will never “have a bill at the end,” Walsh said.
Any remaining equity after the loan is repaid belongs to the home’s owners or their heirs.
“It’s probably the one mortgage product that the FHA has done a good job of fixing with all the new rules and regulations they’ve put in,” said Tom Cali, vice president / general manager of Web Title Agency in Rochester. “They make sure the seniors can afford the reverse mortgage.”
Although seniors receive monthly installment payments, they must still pay taxes and insurance on their home.
Until recent years, companies approved reverse mortgages without screening applicants carefully and some did not realize that they were still responsible for the taxes and insurance, as well as home maintenance.
“Now they have caps as to what people can take out,” Cali said.
People who are 62, the youngest qualifying age for a reverse mortgage, may take out only half the value of their home and receive it in monthly installments. Someone who’s 82 may receive close to two-thirds to three-quarters of the home’s value.
“I think [reverse mortgage] is something that should be part of everyone’s retirement portfolio”
Tom Cali, vice president / general manager of Web Title Agency in Rochester.
“I think it’s something that should be part of everyone’s retirement portfolio,” Cali said. “It’s one thing you have available to you. Though home values seem to not appreciate much, but we don’t have bad depreciation, either. You can rely on it, especially if you take it as a line of credit. You can take it as you need it and enjoy your senior years.”
Before approval, applicants must go through third-party counseling to ensure they understand the terms of the program.
Andrea Colline, education and outreach coordinator for Consumer Credit Counseling Service of Rochester, said that some people use a reverse mortgage to pay for amenities to make their homes more functional and comfortable as they age. Using it for home maintenance and improvements “will make it easier to sell,” Colline said.
“It’s not that a reverse mortgage is a good thing or bad thing but does it fit the individual?” she added.
People who don’t fit the ideal profile include those who are not dedicated to remaining in that home. Since there’s fee involved with obtaining a reverse mortgage, it’s not a short-term solution for obtaining money.
“We review their finances and make sure it’s a sustainable situation,” Walsh said. “We don’t want to just give them money for the next six months. We want to make sure they can meet their obligations and pay the taxes and insurance.”
People who want their children to have their home as a legacy should not consider a reverse mortgage since for most heirs, the only way to keep the home in the family is to pay back the loan after the parents have passed away.
“Ninety percent of the time, the kids say, ‘We want you to be comfortable; use the money if you need it,'” Walsh said.