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Posted: March 30, 2005

Aging in Place

How Reverse Mortgages Help Elderly Stay in Their Home

So you?re over 62 and you love your home, but your income is only holding steady, if not dropping, and it?s certainly not keeping up with inflation. Like lots of older Americans, you want to live to the end of their days in your own home. But can you afford to?

Take my 93-year-old grandmother who lives alone in her home, by choice. Even though once socially outgoing with a vibrant intellect, she can barely recall what she does from one minute to the next. Yet she prefers her ?creature comforts? of home to living with ?strangers? in a group setting or nursing home.

What?s the answer for the millions of Americans who fit this and similar descriptions? For some, the answer is a reverse mortgage ? a financing tool for the elderly to use equity built up in their home to pay their living expenses as seniors in the United States live longer and longer, often outstripping their pensions and other sources of living income.

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Just how does a reverse mortgage help in this instance? By acting as a loan against the equity in the home, a reverse mortgage provides tax-free cash advances, but requires no payments during the term of the loan. Since there are no monthly payments during the life of the loan, the balance grows larger and the equity gets smaller.

The loan is not due and payable until the borrower no longer occupies the home as a principal residence; e.g., when the last surviving borrower sells, moves out permanently or passes away. The borrower must be at least age 62 and own their home or condominium in order to qualify for a reverse mortgage. There are no income or credit requirements to qualify.

Reverse mortgage proceeds are available in a variety of ways ? monthly payments to the elderly, as a lump sum amount, a line of credit ? or a combination of these methods. The cost of getting a reverse mortgage is similar to those for a traditional mortgage. There are typically loan origination fees, appraisal and inspection fees, title policy, mortgage insurance and other common closing costs. And, like a traditional mortgage, these costs can be financed as a part of the mortgage.

Introduced in the late 1980s by the federal Government, reverse mortgages can help homeowners who are "house rich, but cash poor" remain in their homes and still meet their financial obligations. This is an especially important program not only for the elderly, but their adult children and other family members who in other situations would have to scrape from their own income and savings to care for their loved one.

Most homeowners understand traditional, or "forward," mortgage basics. It goes like this: A mortgage company loans you money to purchase your home. As you pay your monthly interest and principal payments, the equity in your home increases and your debt decreases.

But when homeowners remain in their homes, retain the property?s title, and receive tax-free funds without making monthly repayments, this is called a reverse mortgage. It may also be considered a zero-payment home loan, since no monthly mortgage repayments are required.

With a traditional mortgage, you begin with a large amount of debt and very little equity. Through the years as you make monthly payments, your debt decreases as your equity (appreciated cash value of your home) increases. As you pay your mortgage, the cash spent to pay down your mortgage ? plus the increase in general home valuation -- transforms into equity. However, this equity does not translate to cash until the home is sold or refinanced with a home equity loan.

But as the name implies, a reverse mortgage is just the opposite of a forward mortgage, converting homeowner equity into cash. Since the owner retains title to the home throughout the life of the reverse mortgage, they own the home, not a bank or mortgage lender. And, they will never owe more than the value of their home because the amount due can never exceed the home?s value. In most markets, home value continues to rise as the elderly continue to live in the house ? and live off the reverse mortgage proceeds.

Proceeds from a reverse mortgage can be used for virtually anything:

For some, this sounds too good to be true. But according to Vice President of Bank of New York Mortgage Company Joseph DeMarkey, in Westchester County, New York, it?s a matter of public perception at this point. The number one fear or myth, he says, is that ?people think the bank will take your house.? This is simply not true, he adds: ?It?s just a loan. Even Donald Trump takes loans.? When the owner dies, the loan must be repaid by surrendering the home or assets equal to the ?mortgaged? amount.

When I spoke to Mr. DeMarkey, I asked why more seniors weren?t doing this. Well, they are! According to DeMarkey, since 2001 the program has grown nationally by five times ? from about 6,000 loans per year to about 36,000 loans per year. Still, this is a drop in the bucket of opportunity for seniors.

This also is one of the only programs in which the consumer must have a government approved free counselor (from the Department of Housing and Urban Development -- HUD) before signing up. If the elderly person is unable to understand, given advanced illness or Alzheimer?s disease, for example, they can have a caregiver with power of attorney handle the transaction for them.

Finally, DeMarkey says, ?It?s obviously not a good step if you want to leave the kids your house free and clear. However, to ?Age in Place,? as the phrase implies, is not a bad thing, in the end.

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Donna C. Moss, MA, CSW, is associate editor of Pederson Publishing, the publisher of Caregiver?s Home Companion. She also edits The Caregiver?s Hotline weekly newsletter. Moss also is a practicing psychotherapist in Westchester County, New York. She can be reached at donna@caregivershome.com.

READER RESOURCES

For more information, consult with a family legal advisor or read AARP?s rundown on mortgage options.

Refer to this handy mortgage dictionary.

Federal Trade Commission consumer mortgage information.

Check this website out for free consumer information for seniors.

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Commercial use, redistribution or other forms of reuse of this information is strictly prohibited without the prior written permission of Pederson Publishing.

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