Reverse Mortgages give Flexibility to Homeowners
By Nicholas Yulico - Staff Writer
OAKLAND - MARY WAGNER, 79, relies on a 1985 Toyota Camry to travel around the Bay Area, showing off her paintings. But for some time, the elderly artist feared major expenses if her car broke down. Her teacher’s pension and Social Security payments provide a modest income but don’t leave much room for error.
"What would happen if the Toyota gave up, and I wanted to move pieces to an exhibit? I’d be very upset," Wagner said. So a few weeks ago, Wagner joined the growing ranks of senior citizens signing up for reverse mortgages, which allow people to turn their homes into cash machines by pulling out the equity while still living in the dwellings.
Rather than a traditional mortgage, where you pay a lender each month, a reverse mortgage results in a lender sending you checks
People over 62 are eligible to borrow against the equity in their home to get tax-free income. No loan payments are due until the loan ends — typically when an elder sells the house or dies.
Money can come in lump-sum cash payments, regular monthly payments, a line of credit or a combination of these options. The loan amount is determined by a formula based on the borrower's age, the house's value and whether the person is single or married.
In Wagner's case, it allowed her to cash in on the appreciated value of her Oakland hills home while still living in it. She purchased the property in 1975 for $57,000, she said, and it is now appraised at $700,000.
Wagner was able to obtain a $239,000 reverse mortgage. She took a small lump-sum payment to pay off the remainder of her existing mortgage. She also also opted to receive $250 in monthly income and set up a $156,000 line of credit, which she can draw from when she needs cash.
"This now gives me the feeling that anything serious, I can handle," Wagner said.
Types of reverse mortgages
There are three main types of reverse mortgages, which carry different origination fees, rates and borrowing limits. However, they share several common features:
- Your age must be 62 years or older. The older you are, the more cash you can get. The more your home is worth, the more cash you can get.
- The interest is compounded.
- The loans are asset-based and don't require personal credit ratings or monthly payoffs, like home equity credit lines.
- You must pay off your existing home mortgage before getting a reverse mortgage; or you can use a lump-sum payment from the reverse mortgage to pay off the original loan.
- The mortgages are non-recourse loans, which means lenders can only look to a home's value for repayment. In other words, you never owe more than your home is worth when your loan is repaid.
- The income from the loan is non-taxableand doesn't affect Social Security benefits but could affect other public assistance benefits, such as Medicare, Medicaid/MediCal and Supplemental Security Income.
While some have criticized reverse mortgages for their high upfront fees, the products are increasing in popularity and can be good sources of income for the right candidates.
FHA insured HECMs (Home Equity Conversion Mortgages) account for almost 95% of all reverse mortgages
The Home Equity Conversion Mortgage (HECM), a reverse mortgage that is insured by the federal government, is the most popular product and accounts for about 95 percent of all reverse mortgages. From fiscal 2001 to 2004, HECMs increased 470 percent, said Jeff Taylor, a vice president with Wells Fargo Home Mortgage. The amount of HECMs issued in the Bay Area so far this year is double that of this time last year, he said.
"Business has been picking up fairly dramatically and has for the overall industry for the last two years," said Marty Appel, a loan consultant with Bay Area Reverse Mortgage.
Appel attributes the increase to dwindling stock portfolios of many seniors on fixed incomes.
Taylor, of Wells Fargo, said the No. 1 use of reverse mortgages is paying off an existing home mortgage. This, in turn, "creates new cash flow that is non-taxable," he said. Home remodeling is also often a big use of proceeds.
But while reverse mortgages have clear benefits, the product is not for everyone, experts say.
Reverse mortgages are not something you want to for short terms of three or four years due to the large upfront fees.
"This is not a product that you want to get into for three or four years. You want to make a long-term commitment to this because you're paying these very substantial loan fees upfront," said Dave Carey, reverse mortgage program manager with Fannie Mae.
Fees vary on the different products. For the federally insured HECM, there is an upfront lender fee (generally 2 percent), a settlement charge of about $1,800, and a 2 percent mortgage insurance charge. The mortgage rate on the monthly adjustable HECM is currently 5.5 percent.
Besides the extra income they provide, reverse mortgages also can be a great way to minimize certain people's tax burdens, said Charles Sterck, managing director of Sterck Kulik O'Neill, a San Francisco-based CPA firm that specializes in estate planning.
He provided a hypothetical example of a homeowner who bought a house many years ago for $50,000. Say the house has appreciated in value to $1 million. Selling the house would trigger capital gains taxes. If the homeowner is single, he or she gets an exclusion of $250,000 on the appreciated value, and would pay about a 10 percent capital gains tax on the leftover $700,000 increase in value. If married, the couple gets a $500,000 exclusion and pays a 10 percent tax on the remaining $450,000 increase.
But by staying in the home until death with a reverse mortgage, the house would end up being sold and the leftover equity would likely pass on to heirs without any capital gains tax or estate tax being due.
"I like the reverse mortgage because it allows old people to stay in their home, and that gives them the most comfort. ... This is a great tool for the right party," Sterck said.
Source: Augusta Chronicle
