Reverse mortgages, which were once seen as a last resort for the cash-strapped, are becoming popular again. As home values in our region continue to increase and seniors become more comfortable with the program, this presents a viable option for those who need money from their homes while still living in them.
A reverse mortgage is a loan that is available to homeowners 62 years and older, enabling them to convert their equity into cash. The loan can be used for anything from fixing the plumbing to taking on a bucket list. “Reverse mortgage payments provide cash to borrowers and can be used for anything including day-to-day living expenses, property taxes, medical expenses, home improvements, income taxes, debts and more,” said Robert Fatoullah, principal attorney at Ronald Fatoullah & Associates of Great Neck, who specializes in elder law and estate planning. The single common element is the borrower must own the residence free and clear, whether it is a single- or multi family property, condo, co-op unit or modular home.
One of the unique aspects of a reverse mortgage is repayments don’t have to be made as long as the borrower still lives in the house. Payment doesn’t come due until s/he moves out or passes away. “Reverse mortgages are no longer just an option of last resort for seniors,” said Bob Moulton, president of the Americana Mortgage Group in Manhasset. “They are also a strategic tool for retirement income planning, long term healthcare and estate planning.” Instead of moving, many are turning to the program to finance their golden years or pay for health care.
The amount borrowed, which depends on the value of the property, can help seniors fill the gaps that their fixed incomes may create. Borrowers receive their money either as monthly checks, a line of credit or as a lump sum payment. Seniors on Medicaid or Social Security are also eligible for reverse mortgages and the loan won’t hurt those benefits—if they spend smartly. “Reverse mortgage proceeds should generally be spent within the same calendar month they are received so that the relevant government program does not count the proceeds as an asset, which could jeopardize the benefit being received,” Fatoullah explained.
It’s still important to carefully examine a reverse mortgage. Because they can be taken out when a homeowner turns 62, it’s possible to be drawing on that loan for years. Interest continues to build every month and when the borrower moves out of the home or dies, the reverse mortgage could leave a very steep bill. In most cases, the proceeds from selling the home will satisfy the loan, but if it sells for less than what was drawn against it, the borrower is not on the hook. The loan’s insurer—usually the federal government—absorbs the loss.
The federal backing makes reverse mortgages relatively safe for borrowers, but they still can’t borrow more than the home’s appraisal value. However, homeowners are only safe as long as they keep paying their property taxes and insurance (borrowers can use the reverse mortgage to pay for them). If those payments are defaulted on, then banks can seize the property. There are also costs that come with taking out reverse mortgages like lender fees, upfront mortgage insurance and real estate closing costs. This can come out of the money from the loan, however that would drive the costs up because borrowers would then be obligated to pay interest on those fees.
“The amount of upfront costs associated with a reverse mortgage is a deterrent, especially if the individual plans to leave the home within two or three years,” Fatoullah said. “In this case, the senior might consider other less expensive options, such as a traditional home equity loan.”