Retirement Lifestyle: Reverse Mortgages

For seniors whose nest eggs have leaked, leaving nothing but an empty shell, a reverse mortgage might be an option to augment their income. Some lenders consider this type of mortgage a valid opportunity for those living on restricted incomes; others advise against it. We asked a few local experts for their advice on the issue.

“Reverse mortgages enable individuals age 62 and older to use their homes as equity if they need extra cash,” says Mark Unangst, senior vice president at Gershman Mortgage. “Part of the equity is converted into income without the homeowner having to sell the house, give up the title or take on a new monthly mortgage payment. It’s an excellent option if you need extra cash but don’t want to draw down your investments.”

Today’s economic environment has increased demand for the option, says Unangst. “A reverse mortgage is exactly what it sounds like—the payment stream is reversed because instead of making monthly payments to a lender, as with a regular mortgage, the lender makes payments to you,” he explains. “It’s useful because it allows seniors to stay in their homes while receiving cash in the form of a lump-sum payment, monthly income or line of credit.”

According to Unangst, the advantages are many. “The proceeds from a reverse mortgage are not considered income for tax purposes,” he says. “They don’t impact Social Security or Medicare benefits, either.” Another plus is that these mortgages are considered ‘nonrecourse loans,’ which means a lender can seek reimbursement based only on the home’s value. “If that amount isn’t enough to retire the loan, the lender can’t tap into other available assets or income of the borrower or his heirs,” Unangst says. “The maximum amount due on a reverse mortgage is the market value of the home at the time of repayment. If the home is sold to settle the debt and the sales proceeds are more than the loan amount, that equity will be paid to the original borrower or to the estate.”

Some seniors opt for a reverse mortgage because they’re running out of retirement funds, notes Mark Cooper of USA Mortgage. “They want to pay off their regular mortgage so they can free up some cash for discretionary spending,” he says. Others simply want to sell their home and downsize to a smaller space, but can’t get enough cash out of their current home to buy a new one. “If you buy the new home with a reverse mortgage, you can keep the proceeds from the sale of your old home as discretionary income,” he explains. “And, because you’re using the equity in the new home, you’ll never have to make a house payment. This is probably going to be the fastest-growing area for reverse mortgages as the baby boomers begin to downsize from their large family homes.”

A reverse mortgage isn’t for everyone, Cooper acknowledges. “Counseling through a local, HUD-approved agency is mandatory before you can apply,” he says. “You need to understand the program, and review alternate options before you decide if it’s right for you. For example, if you want to leave your home to your children, you should consider other options; in many cases, the home is sold to pay back the reverse mortgage.”

Kevin Terrill, vice president and regional mortgage sales manager at UMB, says the disadvantages of reverse mortgages far outweigh the advantages. “You’re signing your home over to the bank in return for income,” he explains. “You don’t have to qualify based on income and credit rating. But as the boomers age in an uncertain economy, there’s a danger that reverse mortgages could become the next predatory lending issue. I predict we’re going to see less-than-scrupulous lenders taking advantage of desperate seniors. I think reverse mortgages should be avoided.”

For one thing, reverse mortgages are more expensive than traditional mortgages. “They cost two to three times more, and a monthly service charge between $25 and $35 is usually added to the balance of the loan,” Terrill says. Another drawback is that regulations require the homeowner to live on the property on which the loan has been taken. “If you move out for an extended period, say, to go into a nursing home, the lender can call the note and take your house,” he says. “A regular mortgage is a much better deal all around.”

The only situation in which a reverse mortgage is a good idea is if you own your home free and clear and really need an extra income source, Terrill says. “Even then, proceed with great caution and pay close attention to the mandatory counseling,” he advises. “There’s a reason why HUD-approved counselors give you every reason in the world to avoid a reverse mortgage. Don’t hurry into it.”