By: Richard Feldman, CFP, MBA
Try and picture a scenario in which a mortgage company sends you a check every month rather than you sending them a check. This is exactly what you get when you take out a reverse mortgage. Reverse mortgages are gaining in popularity because of increased life expectancies, higher medical costs, and the downturn of the stock market over the past few years.
A reverse mortgage is a special type of loan that lets a homeowner 62 years of age or older convert the equity in his or her home into cash without having to sell their home or give up title. The home can be one of the largest assets a senior owns and a reverse mortgage allows individuals to access that capital as an income stream without having to vacate the property. “A lot of people are in more of a financial bind than they thought they would be in at this age because they’re not getting as high a return on their investments and their expenses are higher than they anticipated. These are the type of conditions that create demand for reverse mortgages say’s Mike Broderick a reverse mortgage specialist at Seattle Mortgage Company.”
Reverse mortgages are for house rich, cash poor people who own their own home and want to convert the equity they have built in that home into readily available cash. Rather than requiring the borrower to make payments to a lender each month, as with a typical forward mortgage or home equity loan, a reverse mortgage pays cash to the borrower. The amount a borrower can access typically depends on his or her age, the type of reverse mortgage, prevailing interest rates, location of the residence, and the value of the home. Borrowers typically have several means of accessing their capital: in a lump sum, via fixed monthly payments, through an on-demand line of credit, or a combination of these options.
Most reverse mortgages have five payment options:
Tenure: Borrowers receive equal monthly payments for as long as at least one borrower lives and continues to occupy the property as a principle residence.
Term: Borrowers receive equal monthly payments for a fixed period of months.
Line of Credit: This method provides borrowers cash on demand, at the borrowers discretion until credit is exhausted.
Modified Tenure: This method combines a line of credit with monthly cash payments for as long as the borrower remains in the home and credit is not exhausted.
Modified Term: This method combines a line of credit with monthly payments for a fixed period specified by the borrower.
Most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as the borrower lives in the home. However, the borrower remains responsible for real estate taxes, insurance, utilities, repairs and maintenance. Cash accessed via a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits although it may affect eligibility for other government programs such as Medicaid.
The Reverse Mortgage Market
The Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development, spawned the U.S. market for reverse mortgages in 1987 when it unveiled the Home Equity Conversion Mortgage (HECM) as part of a reverse mortgage pilot program.
More than 720,000 reverse mortgages have been taken out in the United States since 1987, according to the National Reverse Mortgage Lenders Association in Washington D.C.
Reverse mortgages come with potentially steep origination fees, upfront mortgage insurance premiums, appraisal fees, and other standard closing costs. Just like traditional mortgages these fees can be financed as part of the loan.
Reverse mortgages may not be for everyone. Individuals that do not have liquidity problems or who want to leave their primary residence to their children should not use a reverse mortgage. But for those individuals who are in a cash crunch and do not either have children or want to to rely on their children to provide them with a secure retirement, tapping the equity in your home to increase your cash flow in retirement may make sense.
Be sure to do your research before applying for a reverse mortgage. You may obtain information regarding reverse mortgages from Fannie Mae, AARP, and the National Reverse Mortgage Lenders Association in Washington D.C.
 The Dash For Cash; Port, David – Senior Market Advisor, August 2003