The Elder Law Forum by Professor Michael Myers Editor's Note: The Elder Law Forum is a public service of the University of South Dakota School of Law, an extension of the SENIOR LEGAL HOTLINE available at no cost to persons 60 and older at 605-677-6343 and firstname.lastname@example.org during regular business hours. The Elder Law Forum delivers information and educational material by radio, a weekly newspaper column, and Law School research papers placed on the USD School of Law Website. Professor Myers teaches Elder Law at the School of Law.
Tapping cash via
a reverse mortgage
These are difficult times for seniors on fixed incomes. A recalcitrant stock market has stripped away 40 to 50 percent of the value of many personal portfolios. With interest rates the lowest in decades, bond market yields are correspondingly minimal. Retirement "nest eggs" that sustained comfortable life styles 24 months ago have dwindled in value, forcing a number of retirees back into the workforce.
A bitter lesson has been learned: money does not just move from one sector of the economy to another: it diminishes in value, disappears, and quite literally evaporates.
As we move into the first quarter of 2003 there remains a contradictory silver lining � the housing market, the "real estate bubble."
Retired homeowners have watched the value of their homesteads appreciate � along with their property tax assessments � in anticipation of its inclusion in their estates. Home equity is the "Big Egg" they would like to leave behind. On the other hand home equity is the cushion between good times and hard times.
For some, these are the hard times. For some, it may be time to tap the home equity cash stream through a "reverse mortgage."
At the outset it is important to remember that a reverse mortgage is a "loan," a loan against the home that is not paid while the borrowers live in it. Structured properly, it becomes due when the last surviving borrower dies, sells the home, or permanently moves away.
Essentially, the reverse mortgage permits the conversion of the value of a home into cash without the need to make monthly payments. In effect, it is a loan repayable in a lump sum at a future time when the home is no longer needed by its occupants.
Loan proceeds can be paid in a lump sum to the homeowner, or it can be paid monthly or according to any agreed-upon payment schedule. Alternatively, the agreement can simply provide a credit line to be used at the discretion of the borrowers.
Generally, borrowers must be at least 62 years old. They must occupy the home as a principal residence. Single family one-unit homes are the typical target for reverse mortgages. But some programs accept some multi-unit dwellings, condominiums, planned housing developments, and some manufactured homes. Persons interested in exploring this option should shop among area banks, savings associations, or mortgage companies.
Qualified borrowers must have substantial equity in their home. Older borrowers living in markets where their homes have appreciated substantially will have access to the largest amounts of cash. They should look for loans that are backed by the federally insured Home Equity Conversion Mortgage (HECM). Lenders will provide larger advances under loans that are HECM insured.
Some words of caution: Reverse mortgages can be complicated. Changes in repayment terms and interest rates can be triggered by "fine-print" conditions. Borrowers must be aware they have initiated the transfer of their home ownership a lender under a time frame that is compatible with their life expectancy and estate plan.
But under the banner of "You Can't Take It With You," the reverse mortgage may be worthy of consideration during the "interesting times" within which we live.