OCTOBER 6, 1997 VOLUME 5, NUMBER 14
Older homeowners frequently find that they are unable to afford the services necessary to permit them to remain at home. Not infrequently, the cash shortage exists despite the fact that the home has increased substantially in value. At least some of these homeowners should consider a “reverse mortgage” as a means of generating the needed cash.
Reverse mortgages work just as the name implies. Rather than the homeowner paying a monthly check to cover interest and principal, the bank (or other lender) sends a check to the homeowner each month. If other sources of income are nearly enough to pay costs of home care, the arrangement can make it possible for a frail, elderly homeowner to stay at home.
Since payments are being made to the homeowner, the loan balance increases each month. In addition, interest charges accrue with each payment. If the monthly payments are large, the loan will grow rapidly, and will quickly exceed the value of the home. As a result, monthly payment amounts are usually smaller for younger (and healthier) recipients.
After a reverse mortgage has been in place for some period of time, the homeowner’s health may deteriorate to the point that placement in an adult care home or nursing home is required. When that happens, or when the homeowner dies, the home must be sold and the accumulated loan repaid. Since the home’s equity is at least partly used up by the reverse mortgage payments, there may be little or no estate left to pass to heirs, and the family home will not usually stay in the family.
Clearly, reverse mortgages are not for every homeowner. If there is already a mortgage, for instance, it is unlikely that the additional debt of a reverse mortgage will make sense (even if a lender could be persuaded to add the new debt). And incurring a reverse mortgage for one-time expenditures (like home repairs) will seldom be advisable; since traditional home-equity loans are designed for just such needs, they are better suited for one-time costs.
Since the reverse mortgage debt grows over time, it is not a reasonable option for young, healthy seniors in most cases. In fact, the federal government’s reverse mortgage program (there are other programs run by private agencies and state and local governments) is available only to those over 62 years of age and residing in a single-family residence.
Frequently, the size of monthly payments under a reverse mortgage is dictated by the homeowner’s needs. For example, if a 70-year-old woman needs an additional $1,000 per month to pay for caretakers so that she can remain at home, and her home is worth $80,000, she may only qualify for three or four years of payments (depending on interest rates and the percentage of home value the lender will accept; usually, the maximum “loan-to-value” ratio is approximately 80%, with a maximum of about $100,000). Even though her life expectancy may be more like ten years, she may be forced to sell her home (and move) after the monthly payments end.
Reverse mortgages are not going to solve all elderly homeowners’ financial problems. In the right case, however, a cash-poor senior who needs help for a limited period of home care may find that this option makes staying at home a real possibility.