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Moving Forward With Reverse Mortgages

Terry Savage

In addition to getting rid of a big financial headache, there's now even more of a reward for being a part of the second group.

Using a "reverse mortgage," the estimated 10 million seniors who have paid off their mortgages can now create a monthly "pension" check that will last as long as they live in their home.

Reverse mortgages allow older homeowners to convert part of their home equity into tax-free income. These plans are catching on -- but slowly. That's because seniors who had the good sense to pay down their mortgages are now hesitant to borrow against that home equity to supplement their monthly income.

That's understandable -- but it's a mistake. You should at least consider whether a reverse mortgage might be appropriate for you -- or your parents or grandparents who are "house rich" but income poor.

That's exactly what I did for my own 84-year-old father a few months ago. I helped him take out a reverse mortgage on his paid-up retirement condo. So you see, I'm putting my money where my mouth is. Or to be more accurate, I helped my dad to put his own money in his pocket, just as I'm advising you to consider.

Here's how reverse mortgages work, and where to get more information.

To get a reverse mortgage you (and your spouse or co-owner) must be at least 62 years old. But it's best to wait to make the move until you're at least in your 70s because the amount of money you can receive each month -- or in a lump sum -- is determined by the value of your home, your age and the current level of interest rates. The older you are, the more money you'll receive.

If you'd like to figure out how much money you can receive on a reverse mortgage, go to ReverseMortgage.org and use its handy online calculator. This Web site, run by the National Reverse Mortgage Lenders Association, also will allow you to search for a lender in your area.

To qualify for a reverse mortgage, your original mortgage must be paid off, or have only a small remaining balance that will be paid off as part of the reverse-mortgage process. You sign up with a participating lender, such as a bank or mortgage company. The lender will process the paperwork and give you a choice of ways to receive the money: monthly check, lump sum or line of credit.

There are monthly adjustable-interest costs and significant fees that apply to a reverse mortgage. However, these are rolled into the balance of your loan, so while you should be aware of the costs, they shouldn't be a deterrent to considering a reverse mortgage.

Then there's the big question: What happens if you die, move into a nursing home or sell your house? That's when the reverse mortgage must be repaid. When you sell the home, you repay the reverse mortgage out of the proceeds. (Remember, the home is likely to have increased in value over the years since you took out the reverse mortgage.)

If you move out of your home for longer than one year, then the home can be sold -- unless your spouse and co-owner is still living there. But if you just go to Florida for the winter, spend time in a hospital or have a short stay in a nursing home, you don't have to worry about your house being sold out from under you.

If you die and leave the home to your children, they can take out a new mortgage and repay the reverse mortgage loan. Or they can sell the home and keep the balance after the reverse-mortgage loan is paid off.

Let me stress again: No one can force you to sell the home while you still live there. Another important note: The repayment amount can never exceed the value of your home at the time the loan is repaid. You or your heirs can never owe more than the home is worth when you die or sell it.

There are federal limits on the total size of a reverse mortgage loan, based on where you live. Currently, the caps range from $200,160 to $362,790. There is a bill making its way through Congress that would create a single, higher, national limit.

If your home is worth more than the area lending limit for a traditional reverse mortgage, you can take out a "jumbo" reverse mortgage. In that case, you'll be required to draw down the entire borrowing and put it into a money market account or other investment instead of receiving a monthly check.

Seniors considering a reverse mortgage must have independent counseling, usually given by the AARP over the phone. That means you'll have plenty of chances to ask questions.

This kind of financial independence is priceless and well deserved. Why shouldn't your house pay you back for all the money you've put into it over the years -- especially with the guarantee that you can never lose the roof over your head?

So, if you're a senior -- or if you have parents who might benefit from more monthly income -- it's time to consider a reverse mortgage. And that's The Savage Truth.