Paula and Dennis Arntz were having trouble staying afloat. To supplement their Social Security, the couple, both 67 and retired, were pulling at least $500 a month from their small bank account; their only other financial asset was a $25,000 variable annuity. Maybe, Paula thought, they could eliminate their $1,200 monthly mortgage payment and improve their cash flow by taking out a reverse mortgage on their home in South Florida. But she'd heard horror stories about reverse mortgages — a wife forced to move after her husband died, heirs shut out of their family home. “So many people say, ‘Do not do it,’ “ she says. Should they?
First, the basics. The most common type of reverse mortgage is a federally insured one known as a home equity conversion mortgage (HECM). It allows Americans 62 and older to borrow money against the equity in their home, with no obligation to repay as long as they live there. Once the home sells, the lender is paid back in full from the proceeds. Loans may come in the form of a lump sum or lifetime monthly payments and can also include a line of credit.
Paula was right to be wary of reverse mortgages, which have grown in popularity in recent months but have a reputation that's been sullied by reports of borrowers misled about their risks and consequences, among other problems. Based on discussions with experts, I came up with a series of questions that potential borrowers need to consider, and determined how they apply to the Arntzes.
1. Is this your forever home?
Reverse mortgages are expensive (see the third question). If you or your spouse would want to move later on — or if your home isn't suitable for aging in place — you're better off selling and downsizing. The Arntzes, who live footsteps from the Intracoastal Waterway, can't imagine moving. “If he passed away, I'd stay, and vice versa,” Paula says.
2. How much can you borrow?
Your maximum loan size is based on your home equity, your age (the older you are, the more you can borrow) and interest rates. The Arntzes, who owe $88,000 on a home valued at about $340,000, would be able to borrow about $189,000.
3. Do you know what it will cost?
Mortgage insurance is 2 percent of the appraised value of the home or the federal loan limit, whichever is lower. Closing costs are similar to those of a traditional mortgage. An origination fee paid to the lender varies and is highly negotiable — Paula was quoted figures ranging from $2,000 to $6,000. Steve Irwin, president of the National Reverse Mortgage Lenders Association, advises shopping around, since interest rates vary, too. The Arntzes’ upfront fees would total $16,000, to be deducted from their loan balance.
4. What will you do with the proceeds?
After you've sweated years to accumulate equity in your home, it's courting disaster to get your hands on the money without a clear plan for it. If you blow the cash on something unimportant, there is no do-over. But Paula had it all mapped out. After paying the upfront costs and remaining mortgage, she and Dennis would walk away with about $85,000. They plan to take out $18,500 to rebuild their savings and leave the rest as a line of credit for potential emergencies.
5. Can you afford your ongoing expenses?
Though you won't have to make monthly mortgage payments, you'll risk foreclosure if you don't stay current on your taxes, insurance, homeowner fees and upkeep. Many borrowers don't understand that, according to housing counselor Jackie Boies of Money Management International. For the Arntzes, these expenses total about $500 a month, Paula says — a figure they can handle.
6. Who exactly is borrowing the money?
If you're married but only one of you is taking out the reverse mortgage (maybe because the other spouse isn't yet 62), things can get difficult for the other spouse. If the borrower dies, the survivor inheriting the house can remain there but can't tap the mortgage for more money. If the borrower has to live elsewhere for 12 months or more — say, in assisted living — the loan will come due and the other spouse will probably have to move. The Arntzes, both borrowers, don't have this concern.
7. What will happen when you're gone?
Your lender gets back its money. That amount will be more than you borrowed, because interest was accumulating on the mortgage over the years, even though you didn't have to repay it at the time. Your heirs will have the task of either paying off the mortgage — enabling them to keep the house — or selling the home and receiving any remaining proceeds once the lender has been paid. Dennis’ two adult daughters are aware of the couple's plan and are on board with it.
The final step before obtaining a reverse mortgage is a mandatory session, usually lasting an hour or so, with a federally certified housing counselor. If you're rushed through in 20 minutes, you're probably not getting enough information, notes the Arntzes’ counselor, Eden Lustig of Housing Options Provided for the Elderly. For the couple, the session confirmed that their plan was appropriate. “I'm very relieved,” Paula says.
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