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Consumer Archive

Consumer

Economy drives reverse mortgage shift

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NEW YORK (3/27/12)--The age of homeowners applying for reverse mortgages is dropping. In what used to be a last-resort market dominated by retirees age 70 and older (77% of the market in 1999), only a little more than half of the applicants for reverse mortgages were 70 or older in 2010 (The New York Times, March 15).

In other words, almost half of today's applicants are ages 62 through 69. The shift is not simply because the Department of Housing and Urban Development's Home Equity Conversion Mortgage program (HECM) and the new loan option known as the HECM Saver have made obtaining and paying for a reverse mortgage easier and more affordable.

The biggest driver is debt. Of those who sought counseling--a reverse mortgage application requirement--in 2010, about 67% were seeking relief for household debt.

Combine debt with difficulty obtaining credit and eroding retirement security, and reverse mortgages begin to look attractive as a way to relieve the pressure.

If you have home equity and are at least 62 years old, you might be a good candidate for a reverse mortgage. But before you pursue this option, get the facts about common misconceptions and pay attention to the potential effects of a reverse mortgage on your finances.

Misconceptions:

  • You can be kicked out of your home. As long as you're paying your property taxes and insurance, your lender can not kick you or your surviving spouse out of your home. The reverse mortgage continues until the last surviving borrower sells, moves, or dies.
  • Your heirs will have to pay it off. Your heirs will not have to pay off your reverse mortgage. If it becomes due and your home still has equity, your heirs can sell your house, pay off the reverse mortgage, and keep what's left over. If your house does not have any remaining equity at that time, your heirs will have no personal liability.
  • A low credit score can jeopardize the mortgage. This is not true. Reverse lenders base their lending decision solely on your home's appraised value and your age. You don't have to provide any financial statements or tax returns.
  • Applying is difficult. You have to provide only a handful of documents, and you already have most of them. You have to show your property deed, photo ID, Social Security number, proof of age, proof of homeowners insurance, and a HUD-approved certificate showing that you've completed the mandatory reverse mortgage education and counseling class.
Financial consequences:

  • You might have to pay an origination fee, closing costs, and even a service fee. You almost always will have to pay for an appraisal.
  • You'll have fewer assets for yourself and for your heirs; a reverse mortgage uses up the equity in your home.
  • You still are responsible to pay for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you do not, the loan becomes due and payable.
  • You can't deduct reverse mortgage interest on your income tax returns until you partly or completely pay off the loan.
  • If you are enrolled in or are applying for need-based programs such as Supplemental Security Income or Medicaid, your ability to qualify could be hurt by the money you receive from your reverse mortgage.
  • If you're seriously ill or plan to move in a year or two, a reverse mortgage won't be helpful. The cost of the loan will be too high when amortized over just a few years.
For homeowners who have retained some home equity, who are at least 62 years old, and who plan to remain in their homes, a reverse mortgage might provide a way to tap in to that equity for today's needs. And for some seniors, it's the only available option.

For related information, read "Four Key Steps to No-Regrets Retirement" in the Home & Family Finance Resource Center.