'Mellody's Mail': Reverse Mortgages

Q U E S T I O N: Like many folks, my 70-year-old parents lost a large chunk of retirement funds during the last few years. Now they are thinking of a reverse mortgage as a way to have more cash on hand for their increasing needs. I'm fearful it's not the right choice for them. They live in a city and purchased their home 42 years ago for about $16,000. Home values have gone through the roof and their single family home is worth at least $150,000. Should they think about this as their best option? They don't want another mortgage.

A N S W E R: Before your parents make a decision, it is important to understand what a reverse mortgage is, as well as its advantages and disadvantages. A reverse mortgage is a loan that allows homeowners 62 years of age and older to borrow against the equity in their homes without having to sell the home, give up the title or take on a new monthly mortgage payment. This type of loan is tax-free and need be repaid only when the last borrower dies, sells the home or moves away permanently. At this time, the loan must be repaid in full, including all interest and other charges.

Process and costs for obtaining a reverse mortgage: The process for obtaining a reverse mortgage is different from that of a regular mortgage. First, the potential borrower must meet with a reverse mortgage counselor (your parents can obtain references for counselors from banks offering reverse mortgages or the U.S. Department of Housing and Urban Development). These meetings can take place in person or over the phone and the purpose is to learn about reverse mortgages, discuss alternative options and decide which kind of reverse mortgage best suits their needs. During this process, it is important to compare costs between various lenders, all of which are required to provide a Total Annual Loan Cost estimate.

A major factor in loan approval is the condition of the home. It must be in structurally good condition and free of major problems such as termite damage or roof leaks. However, if repairs are required for loan approval, the costs can be financed through the loan. The total amount a homeowner can borrow depends on the type of reverse mortgage chosen, how much equity is in the home, the loan's interest rate and most importantly, the age of the borrower (other assets and credit history are irrelevant). Generally, the older a person is, the more they can borrow as it is assumed that the loan will be for a shorter period.