Reverse mortgages as a way forward
October 26, 2008
By Sarah Shemkus

The Falmouth Senior Center holds educational seminars on reverse mortgages four or five times each year.

Recently, however, the events have started attracting a lot more interest, the facility's director, John Magnani, said.

"The last time someone came to present on reverse mortgages we probably had double the crowd we normally have," Magnani said.

With prices rising, the stock market falling and economic uncertainty spreading, a growing number of Cape Cod's senior citizens are looking to reverse mortgages as a potential source of stable supplemental income.

When 401(k)s are going down in value, this is a particularly important tool to supplement income that you may be losing," said Darryl Hicks, the vice president of communication for the National Reverse Mortgage Lenders Association.

At the Housing Assistance Corp. in Hyannis, the number of households seeking reverse mortgage counseling — required by state law for those receiving such a loan — more than tripled from the second quarter of the year to the third quarter, jumping from 16 to 52.

"That's definitely been determined by the economic situation," said Nancy Davison, the agency's vice president of operations.

As financial pressures drive increased interest, however, homeowners considering a reverse mortgage should make sure they know exactly what they're getting — and who they are getting from, experts cautioned this week.

"They are not something to be entered into lightly," warned Thomas Kosman, a staff attorney in the Hyannis office of South Coastal Counties Legal Services. A reverse mortgage is, most simply, a type of loan that lets homeowners, generally 62 or older, trade their equity for income.

With a reverse mortgage, a borrower can choose to receive regular monthly payments or open a line of credit. When the homeowner either moves or dies, the loan is paid back out of the proceeds of the property's sale.

Neither the borrower nor his or her heirs will ever have to pay back more than the value of the home. [If the loan exceeds the value of the home, FHA will pay the difference to the bank.] If the home sells for more than is owed, the borrower or the heirs keep the difference.

As the Cape experiences a rising tide of foreclosure proceedings, a reverse mortgage can, in some cases, provide homeowners with enough money to stay in their houses.

In other cases, reverse mortgage funds can pay off an existing home loan, making more money available for basic needs.

"Some people are just trying to pay off their mortgage which will free up money that they will then have to pay off the electric bill and the gas bill," said Cheryl Kramer, the program coordinator for the Housing Assistance Corp.'s Housing Consumer Education Center.

Reverse mortgages, however, are not without their downside, experts said. "I think people are expecting more of a magic bullet than they actually represent," Kosman said.

The fees for the loan can be very expensive. Closing costs often range between $10,000 and $17,000, Kramer said. And monthly insurance [ 1/2% per month FHA Ins. on borrowed amount] and administrative fees [usually $35/mo. servicing fee] can pile on even more cost. These fees are not paid up front, but are rolled into the loan, and can eat up available equity faster than the borrower expects or realizes.

"People don't realize that because they don't have to write a check," said David Cotney, the chief operations officer of the state Division of Banks. [Borrowers may make payments, if and when they wish, and there is no prepayment penalty when an FHA Reverse Mortgage is paid off early. If payments are made during the year, the interest may be deducted from taxes.]

Because the house...[may need]...to be sold to pay off the loan, a reverse mortgage can also prevent homeowners from passing a house on to their children. "If you really are adamant about leaving your home to your kids you may want to consider something else," Hicks said. [ If the borrowers want, they may refinance the house at any time; if the owners pass on and leave the home to the heirs, the heirs may sell or refinance the home, if the amount owed does not exceed the value of the house.]

As a general rule, a potential borrower should consider ...other options before resorting to a reverse mortgage, several experts said.

A reverse mortgage is really a last resort," Kosman said. "The longer you can defer them the more viable they are when you are finally obliged to use them." [Sometimes a senior must make a decision about selling off stocks or bonds, or getting a reverse mortgage, and should get advice as to what makes the most sense for them.]

Homeowners struggling with utility costs can explore energy assistance programs; those looking to do home repairs may qualify for low-interest federal or local loans.

The state requires all reverse mortgage borrowers to receive counseling from an approved agency, such as the Housing Assistance Corp., before completing the loan. At these sessions, trained counselors will make sure the homeowner understands all the features of the product and discuss posible alternatives.

Overall, area housing and financial experts agreed that reverse mortgages can be useful, but should be considered only with extreme caution...[just as any type of financing should be carefully considered].
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"It can be a very valuable tool for keeping someone in their in their home and keeping them independent," Kosman said, "but it's not a panacea."

Reverse mortgage tips...

...Involve trusted advisors - family members, legal counsel, clergy - in your decision.

Be wary of any lender pushing too hard for a reverse mortgage. Be doubly skeptical of anyone suggesting you use the proceeds for some other investment.

Look closely at your budget to make sure a reverse mortgage is really needed.

Make sure all fees, insurance requirements and additional costs are explained clearly

Consider all your options. Other types of loans, assistance programs and grants may be available to help reduce your costs.