Reverse mortgages are the loans that keep on giving - and taking, at the same time.
Unlike conventional home loans that require monthly payments, reverse mortgages - available only to people 62 years and older who have equity in their homes - provide money to help seniors supplement their incomes and stay in their residences throughout their lifetimes.
A reverse mortgage works in the opposite way that a conventional home loan operates. Instead of people gaining equity in their home as they pay off a conventional loan, seniors with reverse mortgages slowly lose their stake in a home, potentially - depending on how long they live - resulting in heirs not being able to gain any money from their parents' real estate.
"It's a good financial tool, but only for the right people," said Nancy Butler of Waterford, a certified financial adviser and motivational speaker who runs a consultant firm called Above All Else, Success in Life & Business.
Butler said she recommends reverse mortgages exclusively for people who want to stay in their homes but do not have the financial means to support a comfortable life without an infusion of money.
The money from a reverse mortgage might be taken in a lump sum to be used for major home repairs that wouldn't otherwise be
affordable, she said, or could be made available as a monthly payout to supplement Social Security and other retirement income. Unused funds accrue nontaxable interest, she added, making the loans even more appealing.
"That's when looking at a reverse mortgage makes sense," she said.
Other financial specialists say they have seen a wide range of reverse-mortgage uses, including paying off existing home loans to reduce monthly obligations and funding home health aides for those requiring long-term medical care. A new lending concept also gives seniors the option of buying a home using a reverse mortgage.
Jerry Delmato, a certified reverse mortgage professional with Genworth Financial Home Equity Access Inc., says savvy seniors are starting to realize that these loans can be a powerful financial-planning tool.
"Someday, reverse mortgages are going to be (part of retirement planning) like IRA accounts," he said.
Buying a residence with a reverse mortgage - including a single-family, multifamily up to four units, manufactured house or condominium - can allow seniors to move into a nicer house than they otherwise might be able to afford, he said, while providing a cushion to pay for maintenance costs and other expenses.
"I think it's going to catch on," Delmato said.
Also catching on are so-called "saver" reverse mortgages, which cut
up-front costs for any senior looking to tap into home equity. While traditional reverse loans charge up-front fees amounting to 2 percent of the house value to pay for mortgage insurance, the lower-cost saver option virtually eliminates this requirement - cutting a $3,000 fee on a $150,000 loan down to only $15, Delmato says. But saver loans reduce the amount of mortgage money that can be borrowed, by 10 percent to 18 percent.
THE BOTTOM LINE: KEEPING THE HOUSE
No matter which reverse mortgage option they choose, how long they live or whether they have less equity in a house than they owe on their loan, seniors are guaranteed to be able to stay in their home for life, so long as they abide by several requirements: They must pay their taxes, stay up-to-date on their homeowners
insurance, keep their property in good repair and live in the home as their primary residence. Condominium owners must keep up with association dues.
Temporary trips to the hospital or a rehabilitation facility are allowed, but anyone who hasn't resided in the home for a full year is subject to having the loan declared due.
The property also can be signed over to a lender after the last of the people listed on the mortgage dies and there is no equity in the home. Any money left over after the sale of the property would go to the homeowner's estate.
"Some people who want to leave something to their heirs hesitate to do the loan," said Debbie German, a reverse mortgage manager and counselor for Springboard Consumer Credit Management. "Others who worked all their life say, 'Now it's time for us.'"
Heirs are never obligated to pay the difference between what a homeowner owes on a reverse mortgage and what the property is worth. The difference would be paid by mortgage insurance.
"If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan," according to a reverse-loan pamphlet distributed by AARP.
Financially, people make out better from a reverse mortgage if they live a long life. For that reason, reverse mortgages are recommended largely for married couples at least 62 years old who include at least one person in good health. If one person is under the minimum age for a reverse mortgage, legal
advice is recommended.
MARKET HAS SOFTENED
Despite a spike in the number of people eligible for reverse mortgages because of the aging Baby Boom generation, the market for these loans has shrunk in recent years as several financial institutions - including Waterbury-based Webster Bank - have backed away from offering them.
Delmato, of Genworth, said declining home equity statewide has kept some people from taking out reverse mortgages in recent years. These loans are used by only about 2 percent of eligible home borrowers nationally.
But he believes that as people become more comfortable with the idea of reverse mortgages and shrug off some of the misconceptions - such as the idea that the borrower is essentially giving the house to the lender - these loans will become more accepted.
"It's just like any other mortgage," Delmato said. "The lender gets the house if the borrower doesn't live up to the terms of the loan - if they don't make their
payments on time."
Delmato says a concern among some people considering reverse mortgages is whether they will have anything to leave to their children. But he estimates at least 80 percent of
family members encourage their parents to use their equity to extend their ability to stay at home.
"I tell people that it's like if you have $150,000 in the bank and you need to spend it, wouldn't you spend it?" Delmato said. "There's less financial anxiety or pressure once it's done."
Unscrupulous lenders in the early days of reverse mortgages may have tarnished the reputation of these loans, said Butler, but new regulations have made them a safer bet. She advises that several people be brought into the decision-making process before proceeding with a reverse mortgage - including family members, an accountant, an attorney, a financial adviser and perhaps even a housing counselor.
But Butler added that the emotional security of seeing a parent enjoy the last few months of life at home can often trump financial considerations and weigh in favor of a reverse mortgage even for someone in declining health.
"Sometimes the kids are better off than their parents ... (and) don't need the money," she said. "Sometimes it's not just about the cost."