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A Reverse Mortgage For Mom And Dad

If you are financially well off but your elderly parents are not, it can be tricky to figure out how to assist them without overextending yourself. One answer could be to help them make profitable use of what may well be their biggest asset: their home. A reverse mortgage, a special loan that need not be repaid until the borrowers die or sell their home, can provide a lump sum, line of credit, or regular payments to older homeowners. Though historically controversial for high fees and unscrupulous marketing tactics, reverse mortgages have been improved by recent legislation and could now be a viable option for many homeowners.

Since it was created in 1990, the federal Home Equity Conversion Mortgage insurance program (which covers 90% of all reverse mortgages nationwide) has insured 457,777 loans, and more than 60% of those were approved between Oct. 1, 2005, and September 30, 2008. The surging popularity comes despite the recent decline in home values, which can limit the amount of equity available to reverse mortgage borrowers. At a time when it may be difficult to sell a house or obtain a home equity line of credit, a reverse mortgage could be an appealing alternative for tapping a home’s value.

With a regular home loan, you borrow to finance a purchase and then repay the principal and interest over a fixed period. In contrast, most reverse mortgage borrowers own their homes outright. The maximum amount they can borrow is based mostly on their age (borrowers must be at least 62) and the value of their home. If the homeowners stay until they die, the home will typically be sold to pay off the loan, though heirs could try to come up with the cash to retire the mortgage if they wanted to keep the house in the family.

Even though fees are lower now than during the early days of reverse mortgages, these loans still tend to cost more than other types. The expenses, which include mandatory mortgage insurance to safeguard against a drop in the home’s value or the failure of the lender, are added to the balance of the mortgage and don’t have to be paid out of pocket. But fully understanding the structure and cost of this unusual loan is crucial, and the federal government requires every homeowner who applies for a reverse mortgage to receive consumer education and counseling from a U.S. Department of Housing and Urban Development-approved counselor.

The recent rule changes affecting reverse mortgages came as part of the Housing and Economic Recovery Act of 2008, signed into law on July 30. The legislation raises the borrowing limit on federally insured reverse mortgages from a range of $200,160 to $362,790 (in high-cost areas) to a range of $417,000 to $625,500. It also limits origination fees to 2% of the initial $200,000 and 1% of the remainder of the loan, with a total cap of $6,000. And it prohibits financial companies from “cross-promoting” reverse mortgages with annuities or other financial products that may not benefit borrowers. That practice had hurt the reputation of reverse mortgages.

Should your parents consider a reverse mortgage? It depends not only on their financial circumstances but on your own as well. Suppose, for example, that you’re 55 years old and financially secure. Your parents, in their 80s, have just $50,000 in the bank but own a home worth $350,000. Because you don’t expect or need to receive an inheritance from Mom and Dad, it could make sense for them to tap the value of their home through a reverse mortgage. The loan proceeds, after deducting the fees on such a loan, could approach $245,000. If they still owed something on a conventional mortgage on the home, money from the reverse mortgage could go to retire that loan.

Taking a reverse mortgage probably isn’t a good idea if your parents intend to leave their home within five years. If it’s likely they’ll soon sell the property, perhaps to relocate to an assisted-living facility or other retirement housing, the expense of taking a reverse mortgage would probably outweigh its benefits.

To learn more about the pros and cons of reverse mortgages, consult the National Reverse Mortgage Lenders Association (www.reversemortgage.org), or the AARP (www.aarp.org/money/revmort). We can recommend an experienced reverse mortgage specialist and work with you or your parents to weigh this option against other alternatives.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.


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