Reverse Mortgages Offer Some Flexibility
By way of background, Priest — a specialist with the Breton Road office of Allied Mortgage Capital Corp. — rues the day when his retired mother and father put their very comfortable home on the market.
“They still owed about $5,000 on it, and Dad just wasn’t comfortable with the payments. So they sold it and moved into a much smaller, less comfortable place.”
If the same scenario were to come up today, Priest said he’d be all over his father to borrow $7,000 to pay off the mortgage.
“And then he could have tens of thousands of dollars to do with as he wished and with no payments or interest. Period.”
It’s not a scam.
Priest explains that he specializes in a peculiar financial device known as the reverse mortgage. It’s an FHA-HUD program that came into being about 20 years ago, and the general public and, indeed, most mortgage brokers in this part of the country still aren’t fully aware of it.
Priest explains that it works like this:
A reverse mortgage enables a couple who are at least 62 years old and who own a home free and clear, to use a substantial part of that home’s equity without any kind of current obligation — except to pay the taxes on the property.
The older the couple is, the greater the equity they can obtain from the property via a reverse mortgage.
And the arrangement obligates them to no payments.
The firm that writes the mortgage receives payment when the property is sold. It stands first in line. But the key thing, Priest explained, is that the mortgager can’t lay a finger on the property or force a sale of it, so long as either the husband or wife lives in the home.
Priest said AARP long ago endorsed the program. “And AARP says its figures show that more than 20 percent of retired people get a second mortgage on their homes to help them live, but that only 1 percent of retirees has taken advantage of the reverse mortgage.”
Priest terms the reverse an ideal program. “It’s amazing what you can do with it,” he said.
“Let’s suppose an elderly couple with a home that’s free and clear wants to help a grandson or granddaughter buy a house, but they don’t have the cash.
“They can get a reverse mortgage on their house, give the grandchild up to $10,000 without tax obligation to the grandchild and use the rest for anything else they like. Or they just get a line of credit.
“And they never have to make any payments on this mortgage,” he stressed. Instead, he said, the mortgager simply holds a portion of equity in the property and the mortgager’s equity accrues interest as time goes on.
Then, six months after the last owner of the property either dies or becomes a permanent nursing home resident, the estate or the heirs must sell the property, enabling the mortgager to recover its share of the equity and the accrued interest.
And the nice thing about the program, Priest explained, is that there’s no uncomfortable financial pressure on either the mortgager or the owner or estate.
“The mortgage holder is going to want you to get the house listed, but they’re not going to be on your case to take the first offer,” Priest said. The reason for the lack of pressure, he explained, is that the value of the mortgager’s investment continues to grow until the sale. “It’s continuing to accrue interest,” he said, “which is what it’s in business to do, so there’s no pressure as long as you’re making a good faith effort to sell.”
What makes the reverse mortgage so attractive, he added, is the flexibility that it gives the property owners.
“Let’s say they need to be in an assisting living environment or a nursing home. Fine — they reverse the mortgage and get a big chunk of cash to pay for a good long-term care insurance product.
“Or, they can use that same money to buy regular nursing and medical assistance right there in their own home without ever having to leave it.
“Or, maybe their retirement and Social Security payments don’t go quite far enough from month to month. So they get the reverse mortgage and can have, say, $300 or $400 a month paid to them. They can use it like an annuity: a lifetime payout or a period-certain annuity.
“Or, they can simply set up a line of credit and draw on it as they need it, or they can take the lump sum.
“And the beauty of it is that the government recognizes that this money is their money that they’ve already earned and paid taxes on. There’s no tax on it. There’s not even any tax on the interest it draws.”
The concept to bear in mind, he said, is that a paid-up home is a kind of jail containing money, and the reverse mortgage is one key to the lock.
Now just because a couple owns a paid-up $200,000 home doesn’t mean they can get a reverse mortgage for that amount.
HUD sets a top lending limit for every county in the country. In Kent County, the 2002 limit happens to be $144,336.
But Priest said that doesn’t necessarily mean a homeowner can get a reverse mortgage for that amount. The limit is simply the benchmark upon which reverse mortgages are predicated — again depending upon the owners’ ages.
Priest’s Allied software shows that a 62-year-old couple owning a paid-up house worth $144,336 or more would — after fees and costs — net out to about $58,000 in cash or a line of credit.
For a couple that is 65 in the same hypothetical home, the commensurate net would be $62,000.
For a couple at age 70, the net would be $71,171; at 75, it would be $79,980; at 80, it would be $89,494.