George A. Downey is president of Harbor Mortgage Solutions in Braintree. He can be contacted by e-mail at gdowney@harbormortgage.com.
If you’re like most people, you probably think reverse mortgages are a last-ditch solution for desperate cash-strapped senior homeowners, who otherwise would likely be forced to sell their home at some point or loose it to a foreclosing lender. Nothing could be further from the truth. It’s unfortunate, but this is only one of many misconceptions that prevail about reverse mortgages. In fact, these programs may prove to be one of the most valuable financial resources available to burgeoning numbers of seniors who have established significant equity in their homes.
Once the province of a few small banks and private lenders, the great majority of reverse mortgages today are provided through government-sponsored programs, namely the HUD/FHA Home Equity Conversion Mortgage and the Fannie Mae Home Keeper programs. Additionally, Financial Freedom Senior Funding Corp., a subsidiary of Lehman Brothers Bank FSB, provides jumbo loans for higher-valued properties.
The volume of reverse mortgages today is miniscule compared to traditional mortgages, but their popularity is gaining rapidly as more seniors become aware of their unique terms and capabilities. Unlike traditional mortgages where borrowers make monthly payments, in a reverse mortgage the cash flow is reversed and the lender makes payments to the borrower. The catch is the borrower must be age 62 or older and the property must be their primary residence. Further, they must agree to keep the hazard insurance and real estate taxes current, and keep the property properly maintained. That’s it! Then, as long as one of the borrowers continues to live in the property, the loan can never be called. Repayment is due when the property is eventually sold, or the last borrower leaves permanently. Other benefits include:
• No monthly payments. The borrower is not obligated to make any payments to the lender until the loan payoff is due. At that time, all payment distributions and accrued interest is paid. Payment is usually made from the sale of the home or from a refinance if the family desires to keep the property.
• Non-recourse notes. The loan payoff amount can never be greater than the net proceeds realized from the sale of the property. Therefore, if the loan balance exceeds the net sale proceeds, any resulting deficiency is not the responsibility of the borrower or their heirs. On the other hand, any sale proceeds that exceed the loan balance remain the property of the borrower or their heirs.
• Tax-free payments. Payments to the borrower are not taxable and will not affect Social Security benefits. However, needs-based benefit programs like Medicaid may be affected, and the advice of a competent counselor should be sought.
• Payment flexibility. Borrowers can choose to receive payments by lump sum distribution, open credit line, periodic monthly payments or any combination of those methods. And, they are free to change their payment plans anytime they want.
• No restrictions on use of payments. Borrowers are free to use the payments for any purpose they wish. Common uses have been to: payoff mortgages and other debt; supplement retirement income; make home repairs and improvements; purchase or improve a second home; purchase long-term care insurance; fund estate planning decisions; make gifts to family, schools, and charities; help to educate grandchildren; take a vacation; or purchase a new car.
While these programs may appear attractive, they are not suitable for everyone, especially those who anticipate selling in a short period of time, as the costs of a reverse mortgage may be considerably higher than a home equity line or other lending choices. Independent reverse mortgage counseling is mandatory to ensure that a reverse mortgage is the appropriate choice for each prospective borrower. Clearly, they are not for everyone, but everyone should learn more about reverse mortgages and not be misled by common misconceptions.
