Reverse Mortgages Provide Answers for Some (but Not All) Seniors: Much Has Been Written about "House Rich, Cash Poor" Seniors Who Can Now Tap into the Large Amounts of Equity in Their Homes
Hamer, Janet, Partners in Community and Economic Development
Reverse mortgages enable many seniors to stay in their homes with increased retirement income rather than sell them out of necessity to maintain their standard of living or pay for health care. Most of those who opt for reverse mortgages will probably use the equity for health-related expenses, home repairs or services that will allow them to live at home independently longer.
A new product on the rise
Reverse mortgages are designed to give homeowners 62 or older the option of remaining in their homes by means of a "mortgage in reverse"--essentially a loan secured by the borrower's residence. The loan is not repaid for as long as the borrower continues to live in the same home. Instead of paying the lender, as borrowers usually do, the homeowner typically receives equity payments from the lender. The payments may be structured as a lump sum distributed at the transaction's inception, as payments that extend for the term of the loan, or as a line of credit that may be drawn upon at the borrower's discretion.
The reverse mortgage is repaid through the sale of the home when the homeowner moves or dies. Failure to meet contractual obligations such as maintaining the residence or paying property taxes can also end the agreement with the lender.
The number of reverse mortgages written in the United States has accelerated dramatically--from 7,781 in 2001 to 37,829 in 2004. Between 2003 and 2004 alone, the number of these loans nationwide jumped 109 percent. This huge increase has been pushed by rapidly appreciating property values and the aging of the population. The Home Equity Conversion Mortgage, a reverse mortgage product insured by the U.S. Department of Housing and Urban Development since 1989, accounts for 90 percent of the reverse mortgages written, according to the National Reverse Mortgage Lenders Association.
"Aging in place" benefits seniors and government coffers
One of the most compelling arguments for reverse mortgages from a social perspective is that the funds can be used to support long-term care at home. According to a study released by The National Council on Aging, reverse mortgages could help over 13 million Americans pay for long-term care expense at home, thus allowing them to remain independent and in their homes longer.
The study estimates that some 9.8 million elderly households (aged 62 and older) deal with an impairment that makes it hard to live at home. It indicates these households could access as much as $695 billion through reverse mortgages. These funds could go toward family caregiving and other long-term care expenses typically not covered by Medicare, Medicaid or private insurance. Access to these funds would enable many seniors to postpone relocation to an assisted care facility or avoid it altogether, allowing them to "age in place".
"Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages to Pay for Long Term Care," a report funded by the Centers for Medicare and Medicaid Services and the Robert Wood Johnson Foundation, shows how reverse mortgages can alleviate financial pressure not only for individuals and families, but also for state Medicaid programs and the federal government. Increasing the market for reverse mortgages could save Medicaid $3.3 billion annually by 2010.
Low-income homeowners face challenges
What are the implications of reverse mortgages for low-income and very low-income elderly households? For those with significant equity in their homes, reverse mortgages may help to ensure continued independence and quality of life. Two-thirds of households headed by individuals 75 or older are headed by single persons, and three-quarters of these are female. Many live on extremely low incomes.
If their homes have substantial equity, reverse mortgages could be the key to lifting these women out of poverty and helping them live independently. However, many low-income households are in either urban core neighborhoods or rural areas where property values have not appreciated. …