After Mary Falso paid her mortgage and other bills, there wasn't much left over from her retirement income. The Goodyear, Arizona, woman found herself declining invitations to travel because she felt she needed to save her money in case the water heater broke.
Then she took out a reverse mortgage and used the proceeds to pay off the $110,000 mortgage on her home.
"With $900 more in my pocket each month, if I want to go somewhere, I go somewhere. I don't have to worry about a thing," says Falso, 70. "I was a penny pincher. After getting the reverse mortgage, it's just like somebody took a ton of bricks off my shoulders."
During this economic crisis, seniors facing shrinking retirement investments or foreclosure may be exploring reverse mortgages. Reverse mortgages can save some from foreclosure, and they may be a long-term solution for those who struggle to pay bills.
But each individual should explore all financial options in consultation with a HUD-certified credit counselor and a family member or advisor whom they know and trust.
If seniors have a large mortgage and little equity, a reverse mortgage can forestall a foreclosure in the short term, but if they have nothing left over after paying off the mortgage, they may still lose their home, says Jeffrey Taylor, a vice president with Wells Fargo Home Mortgage.
"If you're going to use the reverse mortgage to pay off debt, you better be sure you have other income to pay taxes and insurance," he says.
Reverse mortgages, which have been around for 20 years, allow seniors to access their home's equity while living in their homes. Homeowners 62 and older are eligible for reverse mortgages if the house is their primary residence. Those who take out a federal Department of Housing and Urban Development (HUD)-backed reverse mortgage are required to receive consumer counseling from a HUD-approved counselor: the counseling is usually free or offered for a modest fee.
Borrowers choose to take the cash in a lump sum, as a line of credit, in monthly payments or as a combination of these options. Seniors do not have to pay the loan back until they move out or sell their home.
Those who already have a reverse mortgage needn't worry about declining real-estate values. The loan amount is based on the home's appraised value at the time of closing, so even if the home's value drops below the amount of the loan, seniors can remain in their home, says Denise Hubbard, a reverse mortgage specialist with Mortgage Network, Inc.
"If the home should depreciate in the future, it would only affect how much equity remains when the borrower sells, and this is where the HUD mortgage insurance comes in," says Hubbard. "It in no way affects any monthly payment they receive or their line of credit."
Late last year, the federal government lowered the fees paid by seniors and raised the amount that seniors can borrow against their houses.
Prior to the change, the maximum allowable loan limit varied by region, with more costly areas such as California having higher borrowing limits than states like Alabama. So borrowers with homes of equal value were allowed different-size mortgages, depending upon where they lived, says Meg Burns, director of the HUD office that oversees reverse mortgages.
The new national limit for a reverse mortgage is $417,000 in the continental United States and $625,500 in Alaska and Hawaii.
The amount of equity that a homeowner is entitled to under the program is calculated based on the home's value, the lending limit, the senior's age, and interest rates. If there is a mortgage, outstanding tax bills, or liens on the home, they have to be paid with reverse mortgage proceeds first.
The new law also imposed a $6,000 cap on origination fees. …