Is a reverse mortgage right for you?

I cannot believe that this year is almost over. Merry Christmas and a Happy New Year to all! It is ironic to me that although I have helped so many people in all the years that I have been working with AARP and the Older Persons Action Group this is the first year I will have been alone through Thanksgiving, Christmas and New Years.

Due to my advanced age I have lost all my friends, who have either moved out of Alaska or are deceased. My small family lives a thousand miles away and will not be able to be with me through the holidays this year.

But I am not complaining; it is my choice to live in this wonderful state and I would not live anywhere else.

Part D open enrollment is wrapping up

I hope that all who are eligible for Medicare Part D have already signed up for the 2016 program. The last date to enroll is Dec. 7.

I feel for all of you who have had to put up with the increased prices for premiums and medications. If you are as troubled as I am, I suggest that you phone, mail or visit your congress person and ask him/her how much they pay for their health insurance. Then go home and write a letter to your local newspaper. (And write one to me also).

I know that life is not fair but there are ways to make it better and this is one of them.

Learning about reverse mortgages

I have received several calls asking about “reverse mortgages.” There has also been a plethora of TV and radio ads imploring you to get a reverse mortgage and live in luxury for the rest of your life. I hope you are all as skeptical as I am.

A person aged 62 or older and wants money to pay off a mortgage, supplement income, or pay for healthcare expenses may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.

But take your time: a reverse mortgage can be complicated and might not be right for you. A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. If you do decide to look for one, review the different types of reverse mortgages and comparison shop before you decide on a particular company.

When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free.

Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.

There are three kinds of reverse mortgages:

• single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits;

• proprietary reverse mortgages – private loans;

• federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).

If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity.

The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home. Here are some things to consider about reverse mortgages:

• Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs).

• As you get money through your reverse mortgage, interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time.

• Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you could get with a variable rate loan.

• Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.

• In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance and other expenses. And, if you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan.

A financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. You are still responsible for maintaining your home.

• With HECM loans, if you signed the loan paperwork and your spouse didn’t, in certain situations, your spouse may continue to live in the home even after you die if he or she pays taxes and insurance, and continues to maintain the property. But your spouse will stop getting money from the HECM, since he or she wasn’t part of the loan agreement.

Reverse mortgages can use up the equity in your home, which means fewer assets for you and your heirs. Most reverse mortgages have something called a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.  

If you are still thinking about a reverse mortgage, please think some more and discuss it with your relatives and perhaps a trusted financial advocate.

Rita Hatch is an Older Persons Action Group board member and volunteers for OPAG’s Medicare assistance program. Her her in Anchorage at 276-1059 or toll-free statewide at 1-800-478-1059. Her email address is ritaopag@gci.net.