House rich, cash poor

by Don Kuehn

"My roof needed to be replaced and I had other maintenance problems that I just couldn't afford to handle." That was Margaret's plight not long ago. Since her husband died, repairs and upkeep have been a tough balancing act on her teacher retirement income. Margaret was convinced that she was only a few months away from putting her beloved house on the market and moving into a smaller place.

As with most seniors, Margaret's home was her biggest asset. Her paid-up house in a modest neighborhood was worth about $145,000, she guessed. With her limited savings she fit the classic definition of "house rich, cash poor."

On the advice of friends in a seniors group she belonged to, Margaret investigated a way to have someone pay her to stay in her home. She took out a reverse mortgage, joining more than 70,000 people who have taken such loans since 1989.

Although many people are relatively unfamiliar with reverse mortgages, they have gained in popularity in recent years. Instead of paying the bank each month, the bank pays you tax-free income. In return, you repay the mortgage when the house is sold, when the last surviving borrower moves out or when your estate settles your affairs after your death.

You, or your heirs, keep any proceeds in excess of what is owed to the lender after the loan is settled. No matter how long you continue to live in the house, you cannot be forced to sell or vacate--as long as you abide by the loan agreement.

In an era of plummeting pensions and plunging portfolios, reverse mortgages make sense for many--but not all--seniors.

To qualify, the borrower must be at least 62 years of age, own the house and use it as a primary residence. All related closing costs (title, appraisal, loan origination, etc.) are the responsibility of the borrower--just like a regular mortgage loan. The difference is that there never will be another house payment check to write. Just the opposite: The lender will write the check to the borrower every month, or establish a credit line that can be tapped at any time or make a lump-sum pay out.

Because you continue to hold title to the home, all taxes and insurance as well as upkeep remain your responsibility. Needed repairs can be made out of the proceeds of the loan or by using the credit line.

The typical amount an institution will lend in a reverse mortgage is not more than 65 percent. That leaves a comfortable cushion for the lender and means there should be a significant balance left to pass on to your heirs or to fund the next phase of you life when you're ready to move on.

As with most money matters, this is not as simple as it might seem. There are different types of reverse mortgages. Some (home equity conversion mortgage or HECMs, for example) are backed by the FHA; others aren't. Some are single-purpose loans--used to fix the roof or repair a leaking foundation, or to pay property taxes or special assessments--expenses that someone on a fixed income might not be able to meet otherwise.

A third kind (and the most expensive) is the proprietary reverse mortgage, which generally provides the largest loan-advance amounts at the highest costs. Proprietary RMs are sold by private companies and their terms can vary widely, so comparison shopping is difficult but very important.

For help in comparing reverse mortgages go to www.aarp.org/revmort. Free counseling is available in every state to help with the decision-making. Visit the Department of Housing and Urban Development Web site (www.hud.gov/offices) for the names of counseling agencies in your state.

For seniors like Margaret, a reverse mortgage meant the difference between being able to stay in her house or being forced to move. These loans are not inexpensive, so consider every other possibility before jumping in.

• Determine if another source of cash might be available to you at a lower cost. A home equity loan might be enough to get over the short-term needs of home repair.
• Shop around and compare the costs, how much you can borrow (per month or in a credit line) and loan satisfaction arrangements.
• Consider whether the proceeds from a reverse mortgage could make you ineligible for any public benefits you now receive or might in the future. For example, if you receive "need based" benefits such as Medicaid or Supplemental Security Income you may need to structure your payments so that they can be spent within the month they are received. If not, they may be considered "income" and render you ineligible for government benefits.

If you've always wondered why you continued to sit on the equity in your house, or wondered how you could unlock the tens of thousands of dollars your house has appreciated over the years, a reverse mortgage may be worth further examination. It is, as you know, your money..