By Deborah Jeanne Sergeant
Why should you consider a reverse mortgage? Officially known as the home equity conversion mortgage, the FHA-insured program allows people who qualify to receive monthly payments that draw from equity in their homes to use for ongoing or periodic expenses. For some people, this can offer many advantages.
Local experts weighed in on the pros of reverse mortgage.
Lynn M. Connors, a reverse mortgage sales manager with Commonfund Mortgage Corp. in Syracuse said she has helped hundreds of people across the state understand reverse mortgages for the past nine years.
“I have never had someone say, ‘I wish I’d never done this,’” she said. “There are so many myths and misconceptions. It takes some education to get people to understand how this works.”
She said that reverse mortgage is a form of a home equity loan that home owners can take against their primary residence. But instead of making monthly payments, they receive income from it. Many people think they have to give up their home’s title, but Connors said that’s not true.
“This is considered a non-recourse loan,” Connors said. “They won’t have to make any payments back. The way the loan gets repaid is by the sale of the home.”
Some people fear that they could end up owing more than the value of the home if they continue to reside in it for an extended period of time. The FHA guarantees that the required repayment will never exceed the value of the home. It must be sold for market value, and any shortfall is covered by the required mortgage insurance.
Connors added that providing both the husband and wife take part in the transaction, the repayment isn’t triggered if one goes to live in a nursing home. (If both leave permanently, the repayment must take place.) There’s no pre-payment penalty if their home becomes unsuitable and no minimum time they must live in the home.
The program works for snowbirds as well, as long as their reverse mortgage property remains their primary residence as represented by their driver’s license and other indicators.
If the couple decides to move, they can sell the house to pay off the reverse mortgage and keep any money above the loan amount. If they remain in the house until they die, their heirs do the same, or arrange financing if they wish to keep the home.
The homeowner must pay off any existing mortgage or home equity loan as part of the reverse mortgage closing, which eliminates the monthly payment.
Until recent years, companies approved reverse mortgages without screening applicants carefully.
The home must pass FHA guidelines for maintenance and safety.
“It’s not the end of the world if they find issues, but these issues must be addressed before the loan or as part of the loan contract after,” Connors said.
Before obtaining a reverse mortgage, applicants are required to undergo counseling by a licensed, third-party reverse mortgage counseling provider. Sherry Tetreault, certified credit counselor and a certified reverse mortgage counselor with Clearpoint Credit Counseling Solutions in Syracuse, said that the counseling helps clients understand the materials they’ve been given.
“We document the session so they know what was discussed,” Tetreault said. “It’s against federal law for the lender to be involved, but their attorney or family may be there. They can help them better understand what’s going on.”
The applicant must pay a $150 fee for the counseling.
Unlike in the past, applicants now must pass financial assessment guidelines.
“The biggest cause of default is people didn’t pay property taxes and homeowner’s insurance,” said Stephen Gargano, statewide manager of the reverse mortgage department at SEFCU Mortgage Services.
Now, potential borrowers must qualify and they’re allowed only a certain percentage of the value of the house, based on age, the value of the house, and current interest rates.
People who are 62, the youngest qualifying age for a reverse mortgage, may take out only half the value of their home and receive it in monthly installments. Someone who’s 82 may receive close to two-thirds to three-quarters of the home’s value.
Amanda Pascall, home ownership center manager at Home Headquarters, Inc. in Syracuse, said that many use reverse mortgage to avoid bankruptcy and as an estate planning tool.
“Reverse mortgage can help you not take your social security ahead of time and let it grow three or four years,” Pascall said. “You’d be surprised at how well that pays off.”
People who don’t fit the ideal profile include those who are not dedicated to remaining in that home. Since there’s a fee involved with obtaining a reverse mortgage, it’s not a short-term solution for obtaining money.
“You have to have a lot of equity in the home in order to be able to get a reverse mortgage,” Pascall said. “If that’s not the case, it won’t be a good option.”
People who want their children to have their home as a legacy should not consider a reverse mortgage since for most heirs, the only way to keep the home in the family is to pay back the loan after the parents have passed away.