Who can get a reverse mortgage?

Someone 62 or older with a house that is his or her main residence and who has received counseling and has a certificate to prove it.

Who should get one?

One ideal candidate is someone who is “house-rich and cash-poor.” And anyone with a continual need for money, not just a colossal need right now. “Continual” is the key word. Other ideal candidates are people who want cash – to live a more comfortable life. They are not the same as people who need cash.

How much can I get?

That depends on your age, the value of the house, and the level of interest rates. The older you are, the more valuable the house, and the lower interest rates are, the more you can borrow.

Who should not get one?

First off, someone thinking of living in a house for only a few years – such as a person planning to move to a warmer climate soon. Reason: those closing costs may not have been worth it.

This example has been calculated by the National Center for Home Equity Conversion: A 75-year-old widow gets a $150,000 reverse mortgage, folding the $6,500 closing costs into the loan. She then begins receiving a monthly income of $562.  Two years later, she moves to a nursing home. Over two years, the monthly income she received was $13,488. Considering the closing costs and the interest she owed, her effective interest rate was almost 50 percent. But if she had lived in the house for 12 years, receiving $80,928, the effective interest rate would have dropped to 10.8 percent.

Why the age of 62?

Perhaps because most Americans retire at age 62. Also, people under 62 have such long life expectancies that the size of the loan available to them might not be significant.

Why have reverse mortgages not become more popular?

In many cases, widows are the ideal borrowers, but they tend not to be knowledgeable about finance and therefore are full of trepidation because their late husbands handled all the finances.

Another reason is that older people tend to be dubious about debt. They remember the Depression, when banks foreclosed on houses right and left. People in their 60s or older become anxious at the thought of obtaining a new mortgage.
Baby boomers, people born right after World War II, are more open to the idea. They are the credit card generation, and debt has never daunted them.

Not only that, but they are not so intent on leaving a large estate. Whereas many older people want to leave their houses to their children.

Still another reason that reverse mortgages are not more popular is that the subject is complicated. You have a variety of choices, and there are darned few easy answers.

Do people use the money frivolously?

In places where house prices have soared, an increasing number of people do use their extra money for luxuries. But most people use the money from reverse mortgages to pay off their existing mortgages and pressing bills, and in general to subsidize their retirement.

Why are reverse mortgages so much in the news lately?

Many older people have not saved nearly enough for their retirement – “enough” is considered roughly 70 or 80 percent of their pre-retirement annual income.

This is especially true of Baby Boomers. They have saved little; many have not invested especially profitably with their 401(K) and other retirement plans.

Just as worrisome, Social Security benefits will surely be reduced in the future, or the age when people receive benefits will be pushed up again, or both. Meanwhile, health-care costs are expected to soar – at the same time that Medicare and Medicaid may be forced to become less generous. In short, the United States is clearly facing a retirement crisis.

One possible solution: encouraging homeowners to retire “on the house.” To continue living in their houses, while borrowing money to live on – a loan, backed by their house, that they must eventually repay.

When must homeowners or their heirs repay the loan?

The loan must be repaid under the following circumstances:

1. The homeowners move out permanently (for 12 consecutive months).
2. They sell the home.
3. The last surviving borrower dies.

Must the house eventually be sold to repay the loan?

Not if the homeowners or their heirs have money to repay the loan, money apart from the sale of the house. Or if they refinance the loan into a traditional forward mortgage.

When will the bank’s payments run out?

If the homeowner has chosen to receive monthly payments, the payments will never end as log as the homeowner lives there. Exception: if the homeowner has chosen a particular reverse mortgage that ends after, say, 10 years. This is a “term” instead of a “tenure” mortgage, and it is rare. A homeowner might do it because he or she is planning to sell another valuable asset in 10 years, like a boat, or start collecting Social Security in a few years.

Why do all reverse mortgages have adjustable rates – they go up with interest rates in general?

HUD does permit fixed-rate mortgages, but the investors who eventually buy reverse mortgages for their portfolios want variable rates; they don’t want to receive interest rates that may remain low when interest rates in general have climbed.