January 04, 2007
Thursday PM

Cash-challenged seniors who want to stay in their own homes have kept reverse mortgages high on the public radar. But not everyone thinks they're such a good idea.

In general, a reverse mortgage converts home equity into cash in several different ways, ranging from monthly payments to an equity line to one-time payouts - or a combination. The amount you can borrow varies according to your age, the value of the home, current interest rates and loan fees.

The benchmark 30-year fixed-rate mortgage rose 1 basis point, to 6.24 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.27 discount and origination points. One year ago, the mortgage index was 6.27 percent; four weeks ago, it was 6.08 percent. The 15-year fixed-rate mortgage rose 3 basis points to 5.99 percent. The 5/1 adjustable-rate mortgage rose 4 basis points to 6.15 percent. The average rate on the 30-year fixed has now risen four weeks in a row. Just before that, it had fallen six weeks in a row. The last time the 30-year rate was this high was Nov. 15, when it was also 6.24 percent.

Reports suggest reverse mortgages can be a source of ready cash when it's needed, similar to other investments. But taking out a reverse mortgage isn't a no-brainer. Candidates for these mortgages should consider both the benefits and the drawbacks before jumping in.

The cons

Zoran Basich, an elder law attorney and operator of Nursing Home Solutions, says he believes reverse mortgage lenders fail to give seniors the full story when it comes to cashing out home equity.

"What they don't tell you is ... that the front load is very high," Basich says. He says lenders like reverse mortgages because "these (loans) are very profitable to write in the short term."

Front-loading refers to upfront costs, paid out of the home's equity at closing. As with conventional mortgages, reverse mortgage lenders make money the old-fashioned way: through interest, origination fees and points. The interest rate varies according to the market. However, closing costs are significantly higher with reverse mortgages.

In addition, borrowers continue to be responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.

To qualify for a reverse mortgage, you must be at least 62 years old. Younger borrowers can't cash out as much equity as older borrowers. Since banks are repaid when the house is sold, it's quite possible a lender might have to carry the note for 20 to 25 years or more. For that reason, a 79-year-old is a much more attractive loan candidate from the bank's perspective.

The matter of Medicaid

Depending on where you live, Basich says the proceeds from a reverse loan could prove a barrier to qualifying for Medicaid, which counts loan proceeds as an asset.

Although each state differs in the fine print, untapped equity in the home is not considered an asset in determining Medicaid eligibility, as long as it's owner-occupied. Recent federal legislation placed the home exemption ceiling at $500,000.

For a homeowner with property worth more, there's definitely an argument for obtaining a reverse mortgage and then spending down the cash. But that cash is also subject to Medicaid's new time limitations on asset reduction. Talk to an eligibility specialist early in the process to see where you stand.

Additionally, according to Basich, the terms of many reverse mortgages, which vary from lender to lender, knock homeowners out of their homes after a period of absence. He says some reverse mortgages require the full loan balance plus accrued interest be repaid when the house is vacated by the owner for a specified period of time - like a prolonged, but temporary, nursing home visit.

"Can you imagine if you have nowhere to go to?" Basich says. "What incentive do you have to get better?"

Views of an advocate

Eric Tyson, author of "Mortgages for Dummies" and other books about personal finance, tends to see reverse mortgages as valuable retirement tools when homeowners understand them.

A former financial counselor, Tyson says counseling -- mandatory before entering into a reverse mortgage - educates seniors to which lenders are reputable and which fall short.

"They should take their time, do their homework, do some reading about the topic," he says. "There's a lot of jargon and lingo they should get down."

He agrees fees associated with reverse mortgages run high. "That's usually the light-bulb moment for prospective borrowers," he says.

The majority of Americans rely on Social Security for their retirement. Problem is, there's often little to supplement Social Security except for the home.

"What are you going to do with that equity? You can't take it with you," he says.

Boyce Watkins, a writer and finance professor at Syracuse University, says that the downside of reverse mortgages can be weighed before moving forward. Get several quotes from reputable banks, understand the implications of ill health and find out how a reverse mortgage could impact Medicaid eligibility.

Ultimately, the decision is yours. Base it on what's right for your individual needs.

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