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Reverse Mortgages: An Important Tool For Seniors |
By: Lawrence N. Berwitz, Esq. & Maureen Rothschild DiTata, Esq.
Berwitz & DiTata LLP
Garden City, New York |
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A reverse mortgage is a valuable alternative to seniors who are house rich but cash poor,. It allows them to convert the equity which has built up in their homes to cash. To such a senior, a reverse mortgage can mean the difference between being forced to sell the home, which has become unaffordable, and remaining in an environment which is both familiar and comfortable.
Unlike a “regular” mortgage, where the borrower makes monthly payments to the lender, with a reverse mortgage, the homeowner has the ability to select the manner in which to receive the proceeds of the mortgage: all at once in a lump sum, in fixed monthly payments over the senior’s lifetime or over a shorter period, in a line of credit which allows the senior to draw on the loan proceeds as needed, or in a combination of these options. While the senior retains title to the property, the lender holds some, if not most, of the equity of the home.
To qualify for a reverse mortgage, the homeowner must be at least 62 years of age. There are no physical, medical, financial or income requirements. The mortgage will not affect title to the property, the senior continues to own the home and hold title to it. Indeed, to secure such a mortgage, the home must be titled either in the seniors name or in the name of the seniors revocable trust. Eligibility is not affected by an existing mortgage on the property.
There is one requirement, however, that is designed to protect the senior and ensure that he or she understands the process: the senior must attend mandatory counseling from an HUD-approved counseling agency. While counseling is usually conducted on a face-to-face basis, telephone counseling is available. The counselor instructs the senior concerning reverse mortgages, provides information as to the payment options available to the senior, evaluates the seniors eligibility to obtain the mortgage, and advises the senior with respect to other available means by which to afford the costs of the seniors daily living. There are various types of reverse mortgages including FHA insured, lender insured, and uninsured. Special fees are associated with each type. These are also among the issues addressed during the mandatory counseling session.
There are no requirements that the proceeds of the reverse mortgage be used for any particular purpose. On the contrary, the proceeds can be expended in whatever manner the senior directs including, but not limited to, prevention of foreclosure, daily living expenses, medical or pharmaceutical costs, long-term health care, transportation, vacations, education, reduction of existing debt and home repairs. While the fact that the home in question is in disrepair will not disqualify the senior from securing a reverse mortgage, often a portion of the proceeds of the mortgage will be earmarked for repairs.
The amount available to be borrowed in a reverse mortgage depends on the age of the applicant, the value and location of the property, the current interest rate, and the manner in which the funds are to be dispersed. The maximum, depending on the lender, ranges from 50 to 75 percent of the homes fair market value. Reverse mortgages contain a non-recourse provision protecting the seniors family from having to repay more than the houses value after the seniors death.
Thus, for instance, a 62 year old who negotiates a monthly adjusting reverse mortgage could elect to receive a lump sum payment of $150,406 or lifetime monthly payments of $858. If the senior opts instead to secure a line of credit, the available limit would equal $150,406 in the year of the mortgage. If the credit line remains unused, the amount available increases at a rate of 4.05 percent yearly. Thus, after 5 years the amount available to the senior would be $183,462 and after 10 years it would increase to $223,783. In contrast, a 75 year old could elect either a lump sum payment of up to $184,877 or monthly payments of $1,211 for life. If this individual opts to take a line of credit, he or she has as much as $184,877 available in that year and, if the credit line remains unused, after 5 years the amount would increase to $225,509 and after 10 years to $275,072.
No payments are due while the reverse mortgage is outstanding, hence the name: the lender makes the payments instead of the borrower. The loan becomes payable when the home is no longer occupied by the senior as a principal residence. The unused portion of a line of credit requires no repayment. The amount due the lender is based upon the amount actually received by the senior. However, interest on funds received continues to accrue from the date the proceeds are paid by the lender until the date of repayment.
The reverse mortgage may be a viable solution for seniors who would otherwise have insufficient income and assets to remain in their homes. It is a flexible and under-utilized tool which, in the appropriate circumstances, may provide a different form of financial security.
Editors Note: The author’s are with Berwitz & DiTata LLP, a Garden City based Elder Law firm. This firm concentrates in Estate and Retirement Distribution Planning; Estate Administration and Elder Law. |
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