Seniors turning to reverse mortgages to save homes

Reverse mortgages have become considerably more popular over the last few years, and now it seems that those who qualify (i.e., over age 62 with sufficient equity in their homes) are using it to pay off both adjustable and fixed-rate loans that have become unaffordable. Currently posted online and running in the February 24th edition of the L.A. Times, I had the opportunity to interview some folks who had recently done that and write about it for the real estate section:

IMAGINE a scenario in which, instead of struggling to come up with the money for a mortgage payment that's resetting to a higher level, you could tap the unused equity in your home not only to pay off that loan but also to have money for living expenses, remodeling, traveling or even investing in a vacation home. For seniors, there is such an option: the reverse mortgage...

With traditional home equity credit lines increasingly difficult to get in a time of declining home values and tight underwriting standards, eligible seniors older than 62 are finding that one benefit of reverse mortgages -- other than no pre-payment penalties and no credit or income qualifications -- is the ability to get rid of the sub-prime and other adjustable loans facing payment increases...

In general, eligible properties for the FHA program must be a principal residence and can include single-family homes, condominiums, manufactured homes built after 1976 or even two- to four-unit multifamily properties. Besides borrowers retaining ownership of the home for the duration of the loan, cash advances can be used for any purpose and don't count as income against Social Security or Medicare benefits -- although it can affect Medicaid and other state or federal assistance, so it's definitely best to check details with an attorney or local expert...

As promising as they sound, however, reverse mortgages do have limitations. Since borrowers need to be at least 62, it can get complicated when one spouse is younger than that. Although some borrowers have solved this problem by transferring the ineligible spouse's interest in the home into a trust, such a plan can backfire when the eligible spouse dies, which would require the original loan amount, all interest charges and fees to be repaid.

Homeowners who are currently in bankruptcy do not qualify, neither do owners of most mobile homes, co-ops or homes on leased land. And even for those owning eligible property types, there has to be sufficient equity remaining in the home after other mortgages and home-equity lines are paid off to close the deal, in which case a traditional home-equity line may suffice. Consequently, experts often counsel applicants to discuss options with their extended families before moving forward...

If a borrower falls ill and needs to stay in a hospital or a nursing home, most reverse mortgages don't come due until 12 months after the property is no longer a principal residence. That gives families time to plan for other options such as selling the home or refinancing with a traditional mortgage to repay the loan in full. And, since reverse mortgages are "non recourse" -- meaning the borrower and any heirs will never owe more than the market value of the home at the time it is sold -- the estate is protected if the homeowner outlives the projected life of the loan or the market value of the property plummets.