Reverse Mortgages Giving Seniors Extra Living Cash

Reverse mortgages satisfy a broad range of needs for senior homeowners

William and Betty Ellis needed to modify their Vancouver home after Mrs. Ellis had a stroke. John and Helen Foy wanted to take a motorcycle trip down the Pacific Coast Highway. Both accomplished their goals using a reverse mortgage.

A reverse mortgage lets homeowners convert the equity in their home into cash. Seniors have used them for everything from accessibility upgrades to medical bills to simply creating extra monthly income.

Last year, reverse mortgages helped about 10,000 seniors stay in their homes while funding health care, home safety modifications, or extra cash flow.

"Many people think they can't access their home equity without taking on a monthly payment," says Peter Bell, president of the National Reverse Mortgage Lenders Association. "A reverse mortgage lets you convert that equity into usable cash without monthly payments or forced relocation."

The Ellis family added a downstairs bedroom. The Foys bought a sidecar for their motorcycle.

"I didn't want another regular mortgage with a monthly payment," Mr. Ellis said. "A reverse mortgage was the next logical option."

What is a reverse mortgage?

In a reverse mortgage, the payment direction is reversed. Instead of you making monthly payments to a lender, the lender makes payments to you. While the loan is outstanding, you keep ownership of the home and make no monthly payments.

Types of reverse mortgages

Three reverse mortgage products are currently available. The most common is the Home Equity Conversion Mortgage (HECM), which is federally insured through the FHA.

Fannie Mae offers the Home Keeper reverse mortgage, developed in the mid-1990s. Fannie Mae also offers the Home Keeper for Home Purchase, which lets seniors use a reverse mortgage to buy a new home.

Financial Freedom Senior Funding Corporation offers a jumbo reverse mortgage called the Cash Account Plan, which lends up to $1 million. HECM and Home Keeper products are available nationwide. The Cash Account Plan is available in 24 states.

Qualifying for a reverse mortgage

You must be at least 62 years old and own your home with equity in it. There are no income or credit requirements.

The property can be a single-family home, condominium, or manufactured home built after 1976. Cooperatives are not currently eligible, though Congress passed legislation last year to allow them once HUD implements the rules.

How you receive the money

You can receive reverse mortgage proceeds in several ways: a lump sum paid upfront; monthly payments for as long as you live in the home; monthly payments over a set period; a line of credit you draw from as needed; or a combination of credit line and monthly payments.

More than 60 percent of borrowers choose the line of credit option. You can switch payment options anytime for a small fee. With a HECM line of credit, your available balance grows each year at the loan's interest rate.

For example, if your HECM rate is 4% and you borrow $100,000 but don't use it, your available balance grows to $104,000 after one year.

What you can use the money for

You can use reverse mortgage proceeds for any purpose. Common uses include supplementing income, home repairs, medical expenses, paying off debt, education, travel, long-term care insurance, or avoiding foreclosure.

You can get a reverse mortgage even if you still owe on a first or second mortgage. Many borrowers use the proceeds to pay off existing mortgage debt or credit card balances.

If you have an outstanding mortgage, the reverse mortgage proceeds must first pay off that debt because a reverse mortgage becomes the only lien on the property.

If what you owe on your home exceeds the amount you could borrow through a reverse mortgage, you cannot qualify.

Loan amount

How much you can borrow depends on your age, the type of reverse mortgage, your home's value, current interest rates, and sometimes your location. Generally, older borrowers with more valuable homes and less existing debt can borrow more.

A 62-year-old might qualify for 35–40% of the home's appraised value, while an 85-year-old might qualify for 65–70%.