Commentary: Reverse mortgages: Exchanging home equity for cash

Daily Record, The (Baltimore), Aug 26, 2002 by Special to The Daily Record

Your home is a wonderful possession. It provides your family with a place to live, a valuable tax deduction and an investment that usually rises in value. If you are over 62, your home may also provide you with an important source of revenue. A reverse mortgage can provide you with money in exchange for your home's equity and can be a good move for people who are "house rich" but "cash poor."

What is a reverse mortgage?

A reverse mortgage is a loan that allows you to use your home's equity to receive cash while you continue to own and live in your home. It might be helpful to compare a reverse mortgage to a traditional mortgage, which we'll call a "forward mortgage." When you initially finance your home with a forward mortgage, you usually make a down payment followed by monthly payments over a number of years. You exchange your cash for equity, which is simply ownership interest in the home. Every month, your debt decreases and your home equity will likely increase. Eventually, you pay off the forward mortgage and receive 100 percent equity in the home.

A reverse mortgage works the same way, except it runs backwards. At the beginning, you have equity in the home. You receive cash in exchange for providing that equity to the lender. As your debt grows larger, your equity grows smaller. You retain ownership of the home during this time and are responsible for taxes, insurance and repairs.

The amount of money you receive from a reverse mortgage depends on your age, your home's value and the loan program you choose. The money can be paid to you in a lump sum, in regular monthly payments or in other amounts you choose. The proceeds can be used for anything including regular living expenses, home repairs or even travel. Proceeds are tax-free, and Social Security and Medicare are not affected.

Keep in mind, a reverse mortgage loan must be paid back plus interest when the last surviving borrower dies, sells the home or permanently moves away. Upon the borrower's death, the borrower's heirs can either repay the loan and keep the home or sell the home to repay the loan.

You can never owe more than your home's value at the time the loan is repaid. Reverse mortgages are non-recourse loans, which means the lender can only derive repayment from proceeds of the property's sale.

Who might benefit?

You must be at least 62 years old to qualify. These loans pay out more money for older home owners, so borrowers are usually in their 70s or older. Your forward mortgage must be paid off or have a low balance, and the reverse mortgage must be for your primary residence. Most single-family homes are eligible, and some townhomes and two- to four-unit properties may also qualify. There are no minimum or maximum home values.

Reverse mortgages may work well in the following situations:

House rich and cash poor -- Someone who has a moderate income, immediate need for cash and limited options for obtaining that money may be a good candidate for a reverse mortgage.

Moderate home and expenses -- Someone in a moderate-priced home and who has moderate expenses may want to consider a reverse mortgage. Those living in expensive homes may find that selling their home and moving to a smaller residence can be a better option.

How it works

Most states require you to receive financial counseling before obtaining a reverse mortgage. You can find certified counselors in your area by asking a government agency or financial advisor for a referral. State and local governments offer some reverse mortgages, although these public-sector loans must generally be used for specific purposes, such as home repairs or property taxes. Private- sector loans, which are available from banks, mortgage lenders and reverse mortgage specialists, can be used for any purpose.

If you want to research this topic, here are two independent Web sites that provide mortgage information: The AARP sponsors www.aarp.org/revmort, and the National Center for Home Equity Conversion has created www.reverse.org. Many government agencies and nonprofit organizations serving seniors also offer informational booklets about reverse mortgages.

A reverse mortgage may be a good idea in certain situations. It provides you with cash in exchange for your home's equity while allowing you to remain in your home. But be informed. Every option in life has pros and cons. If you are interested in a reverse mortgage or other mortgage products like home equity loans or a line of credit, a qualified financial advisor or mortgage broker can discuss your options and help you decide what might work for you.

You may reach Dena Shapiro Frenkel, The Advanced Advisor Group, American Express Financial Advisors at 410-664-5480 or dena.s.frenkel@aexp.com. She is also available for education seminars for business or organizations.