A Guide To Reverse Mortgages and The Elderly
By John Danise & Peter D. Antonoplos
Introduction: What is a reverse mortgage?
A reverse mortgage allows a homeowner to borrow against the equity in their principal residence. The loan is secured by a deed of trust on the property. This option is available to homeowners that are at least 62 years old, and is an attractive option because it allows them to convert their home equity into cash without incurring any personal liability.
When does a reverse mortgage become due?
Generally, the principal and interest stemming from the reverse mortgage does not have to be paid until after the last borrower stops using the home as their principal residence or passes away. The reverse mortgage agreement may contain other conditions for when the loan will become due. Most often, these additional provisions provide that the loan will become due if the borrower fails to pay property taxes on the home or allows the home to deteriorate, and fails to correct either of these problems after being informed of them by the lending company.
How is the loan dispersed to the borrower?
The money paid to the homeowner under a reverse mortgage can be paid in a number of ways. The homeowner usually chooses to receive a monthly cash advance. Homeowners, however, often have the option to receive a lump sum cash payment or open a “creditline" account, which allows the homeowner to decide the time and amount of money dispersed to them.
How does one qualify for a reverse mortgage?
To qualify for a reverse mortgage, the homeowners must be at least 62 years old, own a home, and live in the home as their primary residence. The homeowners must have equity in their home. Unlike traditional loans, an applicant’s credit score and income do not affect their ability to apply for a reverse mortgage because the borrower does not make monthly payments to the lender to pay off the loan. Therefore, the homeowners cannot default on the loan by failing to make monthly payments. This type of loan is defined as a non-recourse loan because the individuals taking out the loan have no personal liability on the amount due.
How is the amount you get from a reversed mortgage?
The amount of the loan the homeowners qualify for depends on a number of factors, which often include: the age of the homeowners when they applied for the loan, the loan program chosen by the homeowners, the value of the home, the current interest rate, and the location of the home.
What if there is a mortgage or other outstanding lien on my home?
Generally, homeowners may still take out a reverse mortgage if there is a mortgage or outstanding lien on their home, provided they still have enough equity in their property to qualify for a loan after such liens are accounted for. The reverse mortgage will pay off any outstanding liens against the property before any funds are dispersed to the homeowners. The amount paid to clear the property of any previous liens will be considered part of the principal of the non-recourse loan, thereby wrapping the balance of your existing mortgage into the balance of your reverse mortgages.
Occasionally, a lender will require that your property be free and clear of any other lien in order for your property to qualify as security for a reverse mortgage.
How does the estate pay back a reverse mortgage?
Once the borrower passes, their estate is typically given four options to pay back the reverse mortgage. Under the first option, the estate can elect to pay off the reverse mortgage with the proceeds from the estate. The estate cannot choose this option unless the corpus of the estate, after accounting for various administrative fees and the decedent’s estate planning portfolio, is big enough to pay off the loan.
The second option allows the estate to refinance out the reverse mortgage with a conventional loan. This will, in effect, pay off the reverse mortgage, but leave the estate with the burden of fixing the terms of the conventional loan.
Under the third option, the estate can elect to sell the property. In this situation, the reverse mortgage will be satisfied form the proceeds of the sale and the balance of the equity, if any, will be paid to the estate.
The final option the estate has it to issue a deed in lieu of foreclosure to the lender. This keeps the lender from initiating a foreclosure proceeding against the property, and will satisfy the loan.
Typically, the lender will make a request of the estate shortly after the borrower has passed and will give the estate 30 days to elect which of these option it wishes to choose in order to proceed. If no option is chosen, the property faces forced foreclosure.
What are the benefits to a reverse mortgage?
There are many benefits to a reverse mortgage. As discussed above, a reverse mortgage is a non-recourse loan and the homeowners are not personally liable. The only way the lender can get repaid is through equity in the home. If the homeowners live longer than expect, and the amount of the loan (principal plus interest) exceeds the equity in the house when the loan becomes due, insurance covers the difference.
Second, the borrower has tax free use of their home equity as long as they continue to live in their home. A reverse mortgage allows the homeowners to transfer their equity to cash without any personal liability. Clients often use this the money from a reverse mortgage to cover the gap between their income and monthly living expenses, including the cost of health care, home repair, and maintenance of the primary residence necessary to avoid foreclosure. This may relieve clients of the burden they face figuring out how they are going to use their fixed income to keep up with the property tax and maintenance costs associated with their home.
Another advantage of a reverse mortgage is that there are no minimum income or credit score requirements to qualify. If a homeowner has equity in their home and meets the minimum age requirements, it is likely that they qualify for a reverse mortgage.
What are the downsides to a reverse mortgage?
As discussed above, a reverse mortgage allows you to withdraw the equity from your residence while you are alive. However, this means that if you want to give the house to your children, they will need to pay off the loan. The fees and obstacles related with the reverse mortgage process may be very difficult for your children to handle. This leads many clients to feel like the cost of the process outweighs the benefits.
A second problem with the reverse mortgage is that it is typically not for the full value of your home. The amount of the loan that you will qualify for is based on the lowest selling margins in your areas. For example, if your home is worth $500,000 in today’s market, the value limit the lender places on the property may reduce your home’s value for the purpose of computing the reverse mortgage to $420,870. This figure may result in a loan principal limit, depending on the current interest rates, of $300,922. Therefore, $300,922 may be the maximum amount that a reverse mortgage lender is going to give you on a $500,000 house. On top of this, reverse mortgages are very expensive to set up. The reverse mortgage lender is going to subtract all of the lender’s fees upfront. If this figure is $20,000, you will be left with $280,922 as your net principal limit on a $500,000 house. The problems do not end there. When the reverse mortgage company records their deed of trust on your property, they are going to record it for $420,870. Thus, the homeowner’s property is significantly more encumbered that the amount of money that the borrower received. These assumptions are based on the borrower taking monthly payments; the situation is even direr if the borrower elects to take a lump sum payment.
A third problem with a reverse mortgage is caused by the triggering conditions for when the loan becomes due. A reverse mortgage becomes due when the homeowners stop using the home as their principle residence. What if the homeowners require constant care in their old age, and need to move to a nursing home or assisted care facility? This may trigger repayment of the reverse mortgage, and the homeowners may be forced to watch their children handle this difficult issue while they are alive.
Individuals considering a reverse mortgage should also consider why the loan is tax-free. The equity in your home is something you already paid taxes on when you purchased it or paid your mortgage. This benefit may not be as gracious as it seems.
Reverse mortgages seem to be a reflection of the times. As people continue to live long past their age of retirement, borrowing against the equity of their home may be the only way they can continue their current lifestyle. Whether or not to utilize a reverse mortgage is an important decision affecting retirement and estate plans. This is a difficult decision that should not be made alone. At Antonoplos & Associates, we can advise you regarding the costs and benefits of executing a reverse mortgage.
Peter D. Antonoplos, Esq. is a partner in the Law Offices of Antonoplos & Associates. Mr. Antonoplos’ practice focuses on estate planning and real estate matters. Mr. Antonoplos is admitted to practice in the District of Columbia, New York State, and the State of Maryland. Mr. Antonoplos routinely lectures on real estate and probate law issues in Washington, DC and New York. Mr. Antonoplos lives in North West Washington, D.C. He is an avid chess player and motorcycle enthusiast. He may be reached at 202-803-5676 or [email protected].