Reverse Mortgage Loan Blog

By using a reverse mortgage loan, homeowners can turn the value of their home into cash without moving.

Those age 62 or older looking for more income for retirement may want to look at their biggest assets — their homes — for potential help.

By using a reverse mortgage loan, homeowners can turn the value of their home into cash without moving. But specialists stress the importance of getting all information before making a decision.

“A reverse mortgage is a major, fairly complicated transaction. It is not a decision that should be made quickly,” said Bronwyn Belling, reverse mortgage specialist from the AARP Foundation. The AARP Foundation is a division of the AARP funded through a grant from the U.S. Department of Housing and Urban Development.

“In many cases, people are equity rich and cash short,” said John Clancy, reverse mortgage specialist from Charleston. “A reverse mortgage allows them to capitalize on that high equity.”

Clancy, who has been a lender of reverse mortgages since 1994, said he estimates there have been 300,000 reverse mortgages done since Congress mandated it in 1987. The Federal Housing Administration sets guidelines for private lenders.

Free Counseling

To apply for a reverse mortgage loan, individuals must go through a free counseling service to get a certificate, Belling said. Certificates are valid for six months after the counseling session.

AARP, HUD and the National Foundation for Credit Counseling have certified 500 counselors nationwide.

Counseling sessions can be scheduled by appointment or via telephone in conferences that usually last about an hour, said Jackie Goff, certified housing debt management counselor. Goff is one of three counselors certified in West Virginia and is located in Clarksburg.

Counselors discuss why the potential borrower is considering a reverse mortgage and then look to see if there are any other options. Goff said she likes to know the borrower’s income and credit history to give the best advice, although those factors are not required to be given during a counseling session.

“Knowing the whole picture helps me to know if any other option will help them,” Goff said.

Who Can Benefit

To be eligible for a reverse mortgage loan, borrowers must be at least 62 years old and own their homes. The home must be the principle residence and can be up to four units as long as one unit is occupied. Some manufactured homes are eligible, but not mobile homes, Belling said.

“The bank doesn’t own the house any more during a reverse mortgage than when purchasing the home,” Goff said. However, it can impact the borrower’s heirs because of the decrease in equity.

There are three basic combinations of payment for a reverse mortgage. Borrowers can receive a lump sum after closing the loan, choose a line of credit and draw on it at any time or they can opt for monthly payments, Clancy said.

A line of credit will grow almost like interest based upon the yearly interest rates, Clancy said.

However, the line of credit option is a large sum of money for people to manage which could lead to problems depending on individual spending habits, Belling said.

“If anyone is promoting a reverse mortgage to buy something else, homeowners should be wary,” Belling said.

When borrowers opt for monthly payments, that amount is calculated based on their life expectancy. Those payments come in each month as long as a borrower is living in the residence.

Each combination of payment can be converted into another type easily, Clancy said.

The money received from a reverse mortgage is non-taxable. Any money accumulated from growth also is tax free, Clancy said.

Initial costs sometimes can be high, so it is important to make sure that a reverse mortgage really is the best option, Goff said. Other options may include downsizing or selling a home.

Initial costs include appraisals, title searches, mortgage insurance lender premium and a lender loan fee, Goff said. Advocacy groups are working to get those initial costs reduced.

“It’s a very good product and I’ve seen it help a lot of people, but it’s also not for everyone,” Goff said. “It’s important to ask questions.”

With the popularity of reverse mortgage loans, there is now more competition among lenders, Belling said. She advises homeowners to wait six months to a year before getting a loan.

“Unless there is an immediate need, it might be worthwhile to wait before getting a reverse mortgage loan,” Belling said.

Resources

Interested homeowners can visit AARP.org/revmort for information in the Home Made Money section divided into 30 Web pages. The 46-page guide can also be ordered in print form.

On the Web page, potential borrowers also can access a simple calculator that asks for the youngest borrower’s age, estimated property value and a 5-digit ZIP code.

“The biggest risk is not understanding how the loan works,” Belling said.

She suggests that potential borrowers ask friends or relatives to come with them to a counseling session.

“It’s like asking for a second opinion before a medical procedure. It’s nice to have another set of eyes to go over the information,” Belling said.

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