For many of today’s retirees, a home can seem like Fort Knox without a key. Escalating real estate prices have caused many seniors’ homes to skyrocket in value. However, unless they’re willing to sell their home, they will never recapture the added value at a point in their lives when they may need the extra income and liquid assets.
This is why reverse mortgages have become popular with seniors. Designed for homeowners age 62 or older who don’t want to sell their houses, reverse mortgages enable seniors to convert their home equity into cash while living at home for as long as they choose.
A reverse mortgage allows a homeowner to borrow against the equity in a home, but unlike a home-equity loan, the loan and interest do not have to be repaid until the home is sold. The loan might be in the form of a line of credit that can be drawn on as needed, a lump-sum disbursement, a fixed monthly check, or a mix of options.
There are no required out-of-pocket expenses, because closing costs can be funded by the new loan. The reverse mortgage also pays off any existing mortgage, ending a monthly obligation that so many homeowners struggle to satisfy each month. There is no income, employment, medical or credit qualification, and proceeds are not considered income and thus are not taxable.
A real-life example: Gert Taylor faced many challenges. She was recently widowed and had lived in her home in Pawtucket for 50 years. All of her memories were in that home, and she did not want to sell. With her husband’s death, she now had a loss in income, yet she needed to pay day-to-day living expenses and a home equity loan and faced rising medical costs.
By obtaining a reverse mortgage, Mrs. Taylor was able to pay off her existing equity loan, receive $800 a month and create a line of credit for unforeseen circumstances. The monthly check supplements her Social Security benefits, and the line of credit gives her peace of mind.
Children of seniors are usually in favor of this type of loan, because it provides the homeowner with financial independence. Forward-thinking senior homeowners are choosing reverse mortgages as a way to stay in their homes and receive cash for any purpose – from day-to-day living expenses, to paying off existing debt, purchasing a second home or traveling the world. Best of all, they retain the title to their home and remain living independently.
Reverse mortgages have been around for years, but it wasn’t until the early ’90s that they began earning respectability after the Federal Housing Administration started insuring the mortgages. And they continue to be a niche product.
A prime consideration is age. The older the borrower and spouse are, the larger the loan they can obtain. Other variables include lending limits and interest rates. Closing costs and fees make the loan costly if it’s held for only a few years, especially if only a small portion is used. However, now there are reverse mortgage products with no closing costs.
Due to all these factors, seniors are advised to select a lender with reverse mortgage experience. The right lender will provide information on all available options.
As with any lending product, reverse mortgages require significant education and explanation before a customer decides to move forward. But for many seniors whose home seems like Fort Knox, a reverse mortgage may be the key.
Brenda J. Archambault is assistant vice president and reverse mortgage specialist at The Washington Trust Co., which offers free seminars and one-on-one advice to borrowers interested in reverse mortgages. She can be reached at 829-8911.
