Despite the fact that we have enjoyed a long period of relatively low inflation, the cost of living continues to rise. A growing number of seniors living on limited or fixed incomes now find themselves house rich but cash poor. Confronted with mounting cash-flow shortages, many of them have been faced with the unpleasant prospect of having to sell a beloved family home.
Reverse mortgages were developed as one way to address this problem. A reverse mortgage provides funds to seniors, either in a lump sum or over time, using the equity in their homes as collateral. Unlike traditional mortgages or equity loans, which borrowers are required to repay, reverse mortgages require no monthly repayments. The total loan balance, including accumulated interest, is repaid when the home is sold or the last surviving borrower dies.
According to the National Center for Home Equity Conversion, the first known reverse mortgage was issued in 1961 by a banker in Portland, Maine, to the widow of his high school football coach. Reverse mortgages were later used in other areas of the country as well, but it was nearly 20 years before their existence received widespread exposure and government endorsement. Today, there are many types of both federally insured reverse mortgages as well as privately funded programs.
There are more features, restrictions and requirements to reverse mortgages than I have room to list here, but many resources are available to help you learn more.
The Web sites of the U.S. Department of Housing and Urban Development (www.hud.gov) and the AARP (www.aarp.org/revmort ) are good sources of information. The AARP has produced a free guidebook titled, “Home Made Money,” that you can download from its site or you may order it by calling 1-800-209-8085.
One of the provisions of a reverse mortgage is that the homeowner or his estate will never be liable for more than the home’s value, even in a falling real estate market. However, a family member wishing to keep the home after a parent’s death must repay or refinance the debt, but might have difficulty doing so in such a situation. Also, if the homeowner wishes to move and buy another home after spending the proceeds of the reverse mortgage, there may not be sufficient equity remaining in the home to be able to do so.
The decision to obtain a reverse mortgage should only be made after exploring all other options, thoroughly investigating all of the various features, requirements and costs, and especially communicating with your family.
The Department of Housing and Urban Development requires seniors to attend counseling sessions before issuing a federally insured mortgage.
Chris Kehl, vice president of Kennebunk Savings in York, Maine, feels, as I do, that a reverse mortgage should not be the first option a cash-strapped senior should consider. Although he acknowledges that reverse mortgages can sometimes be the best solution to alleviate serious financial problems, he has seen situations where they were the cause of emotional consequences that did not surface until years afterward.
Some alternative strategies he has used include the use of interest-only, fixed-rate home-equity loans to provide cash to homeowners who have had the ability to make modest monthly repayments.
Many states offer assistance for seniors who cannot afford to pay their property taxes. New Hampshire residents can check eligibility requirements by contacting the Department of Revenue Administration at (603) 271-2191 or visit www.revenue.nh.gov and click on “Low and Moderate Income Homeowners Property Tax Relief.” Maine has a program to partially refund property taxes or rent paid on a primary residence.
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