Cover story: Reverse mortgages satisfy many goals

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Mr. Onks says most of the homeowners with whom he works need to use the standard reverse mortgage product because they need to access the maximum possible equity to meet their needs.

“Ninety percent of the reverse mortgages we do are taken out to replace an existing mortgage or home equity loan or both,” Mr. Onks says. “At least 60 percent of our applicants barely meet the qualifications for the loan because they lack sufficient equity in the property.”

The saver option limits the percentage of equity that can be borrowed, even if the homeowners own their home without a mortgage.

As an example, Mr. Onks says that on a $400,000 home without any existing mortgage or home equity loan, a 65-year-old homeowner could borrow $241,221 with a standard fixed-rate reverse mortgage, $193,180 with a saver fixed-rate reverse mortgage, $192,420 with a standard adjustable-rate reverse mortgage and just $159,980 with a saver adjustable-rate reverse mortgage.

The amount that can be borrowed rises as the homeowners age.

“There are basically four types of reverse-mortgage options,” Mr. Rothstein says. “Borrowers can choose a fixed-rate or an adjustable-rate standard HECM or a fixed-rate or adjustable-rate saver HECM. The fixed-rate options both require that borrowers take out the money in a lump sum. The adjustable-rate loan, which can adjust monthly, offers borrowers more choices.”

Borrowers can choose a lump-sum distribution at the closing, a guaranteed monthly income or a line of credit with the adjustable-rate reverse mortgage, or a combination of these options.

“The monthly income option is guaranteed for as long as the homeowners live in the property, even if the mortgage balance rises above the value of the home, but this is only available with an adjustable-rate loan,” Mr. Rothstein says.

When taking out a reverse mortgage, borrowers must pay off their existing mortgage - if they have one - in full, either with cash or with the proceeds from the reverse mortgage. Some borrowers choose to take out a reverse mortgage simply to pay off their existing mortgage and eliminate monthly payments.

While many homeowners use a reverse mortgage to make home improvements or pay for maintenance needs that enable them to live more comfortably in their property as they age, there are homeowners who prefer to move into newer housing and downsize. This type of homeowner can use a home-equity loan for the purchase.

“I’ve worked with several people who want to move and yet want access to the equity they have built up in their home,” Mr. Warner says. “They can do this by using the equity from their home sale to purchase their next home. At the closing for that property, they can also take out a reverse mortgage so that they have access to some of the cash that they used to buy the home.”

Mr. Warner says he worked with a retired postal worker in Silver Spring, Md., who used a reverse mortgage for a move-up purchase, moving from a town home to a single-family home.

“Another customer sold his home in the D.C. area and bought a home in Bethany Beach with about half the cash from the home sale,” Mr. Warner says. “He took out a reverse mortgage on the Bethany Beach place right away so he has additional cash for expenses and no monthly mortgage payments.”

Homeowners with equity available in their home often turn to a home-equity loan or line of credit when they want to access the value in the property, but not all seniors can qualify for one.

“A traditional home loan requires income and credit qualifications as well as requiring the homeowners to make monthly payments on the loan balance,” Mr. Warner says. “In addition, these homeowners will not have the option of taking out a reverse mortgage in the future until they have paid down the home-equity loan so they have equity available again.”

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