“Reverse mortgages can be a valuable tool when used properly, but there is significant risk,” said Kathleen Connell, executive director of the Rhode Island chapter of the AARP. Like any other loan, it must be repaid, but only when the borrower leaves their residence, sells it, or passes away.
Rhode Island Housing and Mortgage Finance Corporation has been offering federally insured Home Equity Conversion Mortgages (reverse mortgages) since 1989. According to spokesman Chris Barnett, the number of people borrowing through this avenue has stayed level in the 15 years it has been offered.
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“It’s a relatively new concept – borrowing money and not making payments,” he said. “But they need to understand how it affects their estate, and in this case the heirs usually sell the house. Most people who use this want to stay independent, they don’t want to be a burden, they want income to pay property taxes and their health bills, and they want to stay in their home.”
To be eligible, borrowers must be at least 62 years of age. Annual household income cannot exceed $78,000, depending on the household size, and the borrower must own and occupy the home as a principal residence. Only owner-occupied, one- to four-family properties are eligible, according to Rhode Island Housing.
“This is the time of year the elderly get hit with two of their biggest expenses – property taxes and heat,” Barnett said. “Reverse mortgages enable seniors to cope with expenses that are rising faster than their fixed income.”
Reverse mortgages give elderly homeowners tax-free income they can use to pay property taxes, medical bills and other costs, Barnett said. They borrow against the value of their homes, but unlike traditional loans, do not have to repay the loans as long as they occupy the house.
“Seniors have borrowed more than $50 million from us over the years,” Barnett said. The program is most popular in Cranston and Warwick, which experienced major development in the 1950s and 1960s. Pawtucket and East Providence come in third and fourth, for the same reason, along with Providence.
“The people who moved here in the 1960s are not retired,” Barnett added. “Thirty years ago they put their homes to work raising families. Now they’re putting them to work financing a comfortable retirement.”
According to Barnett, the average borrower of reverse mortgages through Rhode Island Housing is 74 with an average household income of $14,800. Connell said that in general, the average borrower is 76, a woman living alone, with an income of $10,000 and a home valued at about $100,000.
Staying in their homes is a major concern of most elderly, Connell said, citing a recent survey AARP conducted, and very often a reverse mortgage is the tool to help them stay there.
At Rhode Island Housing, the amount a homeowner can borrow depends on his or her age, the interest rate is the rate effective at the time the loan is closed and the amount of equity in the home is based on an appraisal or the maximum claim amount, whichever is less. The maximum claim amount is $280,749. There are no restrictions on how the loan can be used.
With an aging population, one that is living longer, those people considering a reverse mortgage should think about their personal circumstances, to determine if this is the right financial product for them, Connell and Barnett said.
“It is conceivable that someone might live into their 90s,” Connell said.
If the house is the major asset and if there is a need for assistance in covering living expenses, a reverse mortgage might be appropriate, Barnett said. But if the family decides that they’d like to keep the family home, or if the borrower has other assets like a 401(k).
