Using Reverse Mortgages to Augment Lost Savings

Seniors using reverse mortgages to repair diminished nest eggs
Thursday, 25 June 2009 10:43
BY GERALD J. ROBINSON
NEWJERSEYNEWSROOM.COM

Seniors' portfolios hammered by the stock market decline are getting a boost from reverse mortgages. Such mortgages allow seniors to get monthly payments based on the equity value in their homes – the amount that the value of the home exceeds any mortgage on the home.

It's reported that in recent months the number of reverse mortgages backed by the government jumped nearly 20 percent from the same period last year. And it's not just the stock market decline that's at work: a tough housing market has made it more difficult for seniors to sell their homes and downsize.

Especially for older individuals who intend to remain in their homes for the rest of their lives, the reverse mortgage may be the ideal way to deal with a cash shortfall. It's especially attractive because it can provide monthly payments to the homeowner for life and does not have to be paid off until the owner's death or when the home is sold.

The amount of cash flow that a homeowner can get out of a reverse mortgage mainly depends on four factors:
1. The homeowner's age
2. The amount of equity in the homeowner's home available to support the loan
3. The interest rate on the reverse mortgage
4. And closing costs.

Aging has its compensations, at least in figuring a reverse mortgage payout. The older the homeowner, the better, because the payout increases with the homeowner's age on the date the mortgage begins...

...If there's no mortgage on the home the cash flow from a reverse mortgage will be higher than if there's a mortgage. This is because the equity in the home is 100 percent of its market value. But even if there is a mortgage on the home a reverse mortgage can be attractive, depending on the amount of the mortgage and the value of the home.

A rough idea of the amount of monthly payments that can be obtained from a reverse mortgage can be gleaned from online calculators. Take, for example, the calculator at the AARP website. It shows that a 71-year old Sarasota, Florida homeowner can get a monthly cash flow of $851 if his mortgage-free home is worth $250,000.

Reverse mortgages are not simple. A good source for learning more about them isFannie Mae's Money from Home: A Consumer's Guide to Reverse Mortgage Options. It can be found at fanniemae.com. Fannie Mae's consumer's guide is required reading for anyone seriously thinking about a reverse mortgage.

Gerald J. Robinson, Esq., a former tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition. © Gerald J. Robinson