Reverse Loans can Provide Older Homeowners a Cash Cushion

Source: Detroit Free Press

Many older homeowners are just getting by -- or worse. Retirement savings plans are down. Those 401(k)s have not grown enough to be counted on for retirement. Pension funds are hurting.

But if you're an older homeowner with sufficient equity to qualify, there could be some relief in a Home Equity Conversion Mortgage, also known as a reverse mortgage.

This type of mortgage allows homeowners 62 and older to convert part of the equity in their homes into tax-free cash without having to sell the home, give up the title, or take on a new monthly mortgage payment. It's called a reverse mortgage because instead of the homeowner making a payment to the lender, the lender makes payments to the homeowner. The lender eventually gets its money back when the home is sold or the owner dies. Any excess cash made from the home sale is returned to the owner or the owner's estate.

The Federal Housing Administration guarantees the mortgage, meaning the borrower is protected from losing the property, and the lender is protected from losing the money, if the value of the property declines below the worth of the loan. The proceeds may be taken as a line of credit or as payments. Few have taken advantage of it, partly because they don't like to mortgage a home that's free and clear, or they're concerned about heirs.

For fiscal year 2009, which ended Sept. 30, there were 114,692 reverse mortgages done in the United States. For Michigan, there were 2,088 reverse mortgages done in that same period.
Michael Gruley, president of First Financial Reverse Mortgage in Northville, said his firm has been getting more calls about reverse mortgages. He said they have helped keep some seniors out of foreclosure.

"Many people facing foreclosures are seniors," Gruley said. "There is no credit criteria, the reverse mortgage will pay off the lender so that problem goes away and they don't have to ever make a payment while living in the house. The reverse mortgage frees them to stay in their home to only pay taxes and insurance."
Still, declining home values means many don't have enough equity to qualify. "We are able to help fewer people," Gruley added.

Here are the basics:

• You must be 62 or older, own the property outright or have sufficient equity and occupy the property as your principal residence.

• All closing costs, insurance and interest may be financed in the mortgage. None of the proceeds is taxable. But all closing costs and interest are tax-deductible when the loan is paid.

• The homeowner is not liable if the property declines below the worth of the loan because the lender is guaranteed against loss. However, the property must be maintained and the property taxes must be paid.

• All applicants are to undergo counseling by an expert designated and licensed by the U.S. Department of Housing and Urban Development.

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