Your User-Friendly Guide to Reverse Mortgages

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1 Your User-Friendly Guide to Reverse Mortgages Turn Your Home Equity into Tax-Free Cash Shawna Stephenson, M.S. in Gerontology University of Massachusetts Boston April 2008 Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 1

2 Part 1: Reverse Mortgage Overview Introduction Polly was 78 years old, widowed, and worried about how she would support herself on her monthly Social Security payment and the income from the small business that she owned. She did not want to leave her home, but what choice did she have? Even though her mortgage was paid for, she had a single income and could no longer afford homeowners taxes, insurance and the extensive repairs that her home was in desperate need of. In addition, she was worried about the cost of long-term care that she might need in the future. Faced with the decision to sell her home because she could no longer afford it, Polly sought advice from her children about a reverse mortgage loan. Such a loan allows seniors age 62 and older to tap into their home equity to access tax-free cash. After extensive research on reverse mortgages and with the help of reverse mortgage counselors, family and several local bankers, Polly decided that a reverse mortgage would give her the financial security, flexibility and most importantly the peace of mind to remain independent in her home. As a homeowner in Woburn, Mass., Polly used the money from her loan to upgrade the value of her home and upgrade the quality of her life. She repaired a leaky roof, replaced all of the pipes in the 118 year-old foundation, added a downstairs bathroom for future long-term care needs, and built a front porch. In addition, she was able to do something she could not afford in the past take a vacation with her best friend Barbara. Polly has had the reverse mortgage for five years now, and will never have to worry about leaving her home that she earned and worked so hard for. While a reverse mortgage is not for everybody, for Polly, a homeowner in Woburn, Mass., it was, the best thing she ever did. Everyone s financial needs are unique but the rising cost of healthcare and inflation is universal. Like Polly, many seniors today have little retirement savings and are living on fixed Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 2

3 incomes from Social Security, small private investments and possibly pensions if they are lucky. But despite the fact that these same seniors have little savings, most of them have a very high net worth. How can that be? Today, nearly 80 percent of seniors age 60 and above own their own home (www.census.gov/hhes/www/housing/hvs/annual07/ann07t15.html). And with the dramatically escalating home values the United States as seen for the last decade, these homes are worth a great deal. In fact, Americans 62 or older hold a combined estimated $4.3 trillion of home equity (Index Gauges Reverse Mortgage, p. 23). In the early-to-mid 1900 s, buying a home signified more than just putting a roof over one s head. It was a rite of passage, a lifetime investment, and a personal expression. It was also one of the greatest expenses that people incurred, an expense that often took up to 30 years to pay off. So one cannot overlook the emotional bond seniors have to their homes and why they may never want to leave. According to a recent National Coalition on Aging paper, 92 percent of Americans age and 95 percent of those age 75 and older want to remain in their home as long as possible (Stucki, p. 41, 2005). Additionally, the cost of leaving the home for long-term care is astronomical, giving seniors one more reason to crave independence and want to stay put for as long as possible. Reverse mortgage loans are one option that can allow seniors to remain in their own home. A reverse mortgage is a loan that a senior age 62 years or older may take out on their home to turn a portion, typically 50 percent, of the home s equity into tax-free cash without having to sell the home or give up the title. The cash is paid directly to the homeowner in monthly payments, a lump sum, or a credit line, and no monthly payments are made to the loan as long as the borrower remains in the home. The loan amount depends on the value of the home, the age of the homeowner and the expected interest rates. Borrowers can use the money however they like and will never be forced to give up their home if they meet the basic requirements Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 3

4 such as up-keeping the property, paying insurance and real estate taxes. Generally, the more valuable your home is, the older you are, and the lower the interest the more you can borrow. Prior to the reverse mortgage loan there were only two ways a homeowner could tap into his or her home s equity; sell the home and use the cash to cover expenses, or borrow against the home and make monthly payments. But due to today s mortgage crisis, the reverse mortgage product stands out because it is not dependent on declining incomes or bad credit scores. In the lender s eyes it is viewed as a safe loan because reverse mortgages have so many consumer safety protections in place that are regulated by the Federal Government. These consumer protections include mortgage insurance, free counseling services, interest rate caps, and more. Now that reverse mortgages are becoming more common, seniors have the option to remain financially independent in the comfort of their home, without having to make monthly payments or give up the title. However, as promising as they sound, reverse mortgages do have limitations and need to be considered very carefully. Reverse mortgage analysis can be complicated and the strong ties seniors have to their homes can make it even more challenging to make the right choice about tapping into their home s equity. That s why candidates for reverse mortgages should consider both the pros and cons before jumping in. Risks may include having too little equity down the road to cover moving into a long-term care facility and leaving a smaller inheritance to your children than intended. Knowing all the obstacles you might face during your later years is very important when considering whether a reverse mortgage is the right fit for you. The bottom line is that you should consider all of your options such as downsizing to a something smaller and more affordable, shared housing with another senior, selling the home to your children and renting it back from them on a long-term lease. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 4

5 It is the position of this paper to provide comprehensive information about reverse mortgages that will enable potential candidates to determine if a reverse mortgage is the right fit for them. This Reverse Mortgage Guide is broken into two parts. Part one provides a high-level overview of the reverse mortgage industry and part two is a very detailed, user-friendly guide. The History of Reverse Mortgages The concept of reverse mortgages began in 1961 when Nelson Haynes, a local banker at Deering Savings & Loan in Portland, Maine, wanted to help out the widow of his high school football coach. However, it was not until the early 90 s that reverse mortgages took off. In the 70 s and 80 s reverse mortgages were viewed as a last resort mainly due to the equity share feature that allowed lenders to double dip. The bank made a profit in two ways: the interest charged on the loan and the equity share feature. The equity share feature allowed banks to receive a percentage of the appreciation of the home. If a reverse mortgage was given to a homeowner when the home was valued at $400,000 and at the payback time the home was valued at $600,000, the bank got a cut of the $200,000 appreciation on the home. And the cut was big up to 25 percent. In addition to the bank s double dipping, in some of the worst cases, the bank could take the title or force the homeowner out of his or her home. To top it off, some banks mandated that homeowners purchase other financial products such as annuities and bonds with their reverse mortgage loan. To better understand the equity share, see the chart below. $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Bank's Profit Start of Loan End of Loan Appreciation Bank's Cut Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 5

6 Despite all of its shortcomings in the early days, the momentum for the reverse mortgage industry picked up in 1987 when Congress created The Housing and Community Development Act. This Act included a new and very important feature, a federal mortgage insurance program that was provided by the Federal Housing Administration (FHA), a division of Housing and Urban Development (HUD). This insurance is called Mortgage Insurance Premium (MIP) and is critical to the program s success since it protects the borrower in several ways: 1. Borrowers would always receive the loan money even if the lender went bankrupt. 2. Lender would always receive the loan repayment when the borrower moves out of the house or passes away. 3. Borrowers would never owe more than the value of their home. 4. Borrowers would never have their home taken from them. Ken Scholen is credited with facilitating the insurance program for the reverse mortgage product. Mr. Scholen has specialized in reverse mortgage analysis and education since 1978 and has written several well known and widely used consumer guides, including AARP s Home Made Money guide. Additionally he has trained more than 4,000 consumer counselors and government official and received the Federal Housing Commissioner s Award in 1995 for his work on reverse mortgages. He also founded the National Center for Home Equity Conversion in 1981 and still serves as the director today (www.elderlifeplanning.com/idi/alerts/alert2.htm). In 1988, HUDs reverse mortgage product, the Home Equity Conversion Mortgage (HECM), was made official when it was signed into law by President Ronald Reagan. Today, it has a 90 percent market share over other similar products (www.reversemortgageguides.org/history). In addition to the HECM product, there are two other widely accepted reverse mortgage products available today. All three products are discussed in detail in the guide. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 6

7 1. HECM: The only government backed loan. The typical HECM borrower is in their mid 70s at loan origination and the maximum cash available to borrowers averages $159,000 (Mortgage Banking, p.14). 2. Fannie Mae Home Keeper: Proprietary-loan released in 1995 that is not backed by the government. It is important to note that in 1999 reverse mortgages became more popular as a result of Fannie Mae s work with FHA to reformulize the product to lower interest rates and closing costs and remove the equity share feature. 3. Financial Freedom Cash Advantage Account: Proprietary loan released in 1996 that is designed for high-value homes above $600,000. Gaining Momentum: Today s Reverse Mortgage Market As Baby Boomers (those who were born between 1946 and 1964) approach retirement, the reverse mortgage industry is anticipating strong growth. At 12 percent of the population today, the number of people age 65 and older increased from 2.3 million to 36.5 million between 2000 and These numbers will continue to rise as the oldest of the 79 million baby boomers turn 62 in 2008 and 65 in It is clear from these staggering statistics that the potential market for reverse mortgages is vastly larger than it was ever in the past or is even today (www.usatoday.com/news/nation/ senior-charticle_n.htm). But just a few years ago reverse mortgages weren t widely known or accepted. As the industry has informed consumers about the benefits of reverse mortgage loans, their popularity has grown tremendously in a short period of time. Today, FHA s reverse mortgage program is showing a 30 percent annual increase from 2006 to 2007 alone. And although the reverse mortgage industry is experiencing such growth, only a little more than 345,000 reverse mortgages have been originated since 1990, representing less than a one percent market Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 7

8 Reverse Mortgages Gaining Popularity FY 2008 FY 2007 FY 2006 FY 2005 FY 2004 FY 2003 FY 2002 FY 2001 FY 2000 FY 1999 FY 1998 FY 1997 FY 1996 FY 1995 FY 1994 FY 1993 FY 1992 FY 1991 FY ,218* 107,558 76,351 43,131 37,829 18,097 13,049 7,781 6,640 7,982 7,896 5,208 3,596 4,165 3,365 1,964 1, The federal fiscal year starts Oct 1st and runs through Sep 30th of the following year. * Thru March 2008 Statistics Source : HUD penetration (Index Gauges Reverse Market, p. 28). The chart to the left illustrates the number of HECM loans made in each federal fiscal year since the program began. In addition to the increasing number of eligible seniors, there are several other key reasons why the reverse mortgage program is experiencing rapid growth including government involvement (Medicare and Medicaid), a new and emerging generation of seniors and the influence of today s mass media. Additionally, as noted in a later section of this paper, reverse mortgages are playing a larger role in funding long-term care insurance and private investments such as annuities. The chart below illustrates the central role reverse mortgages may play in financing long-term care (NCOA Study, Barbara Stucki, p.3). Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 8

9 Fueling the Long-Term Care Debate The possibility of a senior using home equity to cover long-term care costs has attracted policy makers for years. And it s obvious why. Private and public spending for nursing facilities and home health care totaled $207 billion in Public spending, including Medicaid and Medicare, totaled $149 billion or 72 percent of this total amount (www.aarp.org/research/longtermcare/trends/fs27r_ltc.html). The chart below illustrates the national spending for long-term care in On average, nearly 60 percent of people age 65 and over will need some long-term care for an average of three years. And as the boomers age, this number will only continue to rise (www.aarp.org/families/caregiving/caring_help/what_does_long_term_care_cost.html). This same group is demanding inhome consumer-directed services and supports. Medicaid, a state administered health care program for low-income seniors, carries a large burden of covering the costs of long-term care, both consumer-directed and nursing facilities. Funding this vast expense has fueled the government s involvement in making the reverse mortgage industry successful and it has also made them one of the largest stakeholders. States view reverse mortgages as a way for seniors to Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 9

10 use their home equity to cover the cost of preventive care or help with activities of daily living, which in turn will keep them out of nursing homes. In fact, in the Strategic Plan for Fiscal Years, HUD pinpoints its reverse mortgage product, HECM, as a means to achieve its goal of helping low-income seniors to remain independent in their homes (Kraemer & Kraemer, p. 6). Consider these staggering conclusions from a 2005 report by the National Coalition on Aging (NCOA) (Stucki, p. 9): Of the nearly 28 million American households with a member age 62 or older, almost half (48%) are candidates to use a reverse mortgage for long-term care. 9.8 million of these candidate households are dealing with an impairment that can make it hard to live at home. Payments from a reverse mortgage can help reduce dependence on Medicaid by lowering the likelihood of seniors who spend down all of their income so that they qualify for Medicaid. Increasing use of this financial option for long-term care could result in savings to Medicaid ranging from $3.3 to $5 billion annually. NCOA has concluded that $953 billion could be tapped through reverse mortgages to finance seniors in-home and long-term care requirements, a national average of $73,000 per household (based on a 2004 study). And while the argument stands that many older Americans are not on Medicaid today the exuberant cost of health care tells a different story. Prices for long-term care services will vary according to the type of service seniors will need, how often and for how long they need it, and where they live. These costs, on average, equal: $5,566 a month for a semi-private room in a nursing home $6,266 a month for a private room in a nursing home $2,968 a month for care in an assisted living unit $19 per hour for a home health aide Source: Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 10

11 These costs can add up quickly. For example, if seniors have to pay for a nursing home for one year it will cost them appromiately $75,000 for a private room and $67,000 for a shared room. With those facts alone, it is easy to see how a middle-income senior could easily run out of money when they are paying out-of-pocket for nursing home expenses. So what is the solution? While solutions vary from senior to senior, a reverse mortgage can help homeowners who are at risk of being placed in a nursing home cover long-term care support in the comfort of their own homes. Older homeowners who qualify for a reverse mortgage can on average receive $72,000 to immediately pay for services, home modifications and other long-term care supports (Stucki, p. 8). Let s take a typical scenario for in-home care and see how far a $100,000 home equity loan would get a senior who needs long-term care supports in the home. The average home health aide charges approximately $18 an hour for a visit. At four hours a day the total cost per month is $2,160 for daily home care. At these rates, a 75 year-old homeowner who has $100,000 in home equity would be able to use a reverse mortgage to cover the typical in-home care (health aide) expenses for about 2.5 years. On the flipside, if the homeowner sold their home and took the money to pay for nursing home or assisted living facility, the cost for 2.5 years could be a lot more at the tune of $187,500. $200,000 $150,000 $100,000 $50,000 Nursing Home In-home Care (4-hours a day) $0 2.5 years Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 11

12 The below chart shows the duration of funds to pay for home and community based care from a HECM credit line of $100,000 (Stucki, p. 32). Note in the below chart that the older you are the more money you will receive; therefore you can afford care for a longer duration of time. Additionally, this chart illustrates how flexible a reverse mortgage is because it allows a borrower to pay for their long-term care needs in a variety of ways. According to industry experts, seniors are catching on to the notion of using reverse mortgage monies to cover their long-term care needs. A recent study by HUD and American Association of Retired Persons (AARP) concluded that 67 percent of reverse mortgage borrowers are using their loan to cover health care costs (Kraemer & Kraemer, p. 126). This conclusion is strengthened further by an interview with Edward Barrett at Your Home For Life, a leading provider of reverse mortgages in New England. Mr. Barrett stated that the majority or the reverse mortgages that his company sells are purchased to cover long-term care costs. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 12

13 Using Home Equity to Purchase Long-Term Care Insurance For those seniors who are not able to afford long-term care insurance, reverse mortgages may offer them a solution. Using a portion of home equity to purchase a long-term care policy is becoming more common. But this can be a risky practice. Borrowers could be paying insurance premiums (on the reverse mortgage and the long-term care insurance policy) and interest for both programs. In addition, they might run out of their home equity money and not be able to pay the yearly LTC insurance premium. In order for programs like this to work, the government and private companies need to determine a way to make this product more attractive. And this might just be in the works. Genworth Financial, Inc., one of the leading long-term care insurance providers in the world, has recently purchased Liberty Reverse Mortgage, a leading reverse mortgage provider (www.investmentnews.com/apps/pbcs.dll/article?aid=/ /free/ ). Government Involvement Today, FHA can only ensure up to 250,000 reverse mortgages per year (Kraemer & Kraemer, p. 5). In 2006, this cap was reconsidered when the U.S. House of Representatives and the U.S. Senate approved The Expanding American Homeownership Act of 2007, which was passed by the House in September 2007, , and by the Senate in December 2007, (http://seniorreversemortgage.wordpress.com/). This Act is extremely important because it raises the HECM lending limit, which provides more seniors with greater access to the program and lowers the origination fees that can be very high. Today, the HECM lending limits vary by county and range from a low of $200,160 to a high of $362,790. Borrowers with expensive homes who live in counties with the lowest loan limit could get a lot less from a HECM loan than they would for a house of the same value in a area with the highest loan limit. For example, if you live in Iowa City, Iowa, and the loan limit is $200,160 but your home is worth $600,000 you are still only eligible for $200,160. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 13

14 However, if you live in Boston, Mass., and the loan limit is $362,790 but your home is worth $600,000 you get $362,790, a lot more than you would receive in Iowa City. Under the Act, a new simplified and increased proposal for a national limit of $417,000 would make reverse mortgages more attractive to lenders and borrowers. Another huge improvement brought on by the Act is that it lowers the origination fees, or fees that cover a lender s operating expenses, by 0.5 percent. Under the HECM program, the origination fee is equal to the greater of $2,000 or 2 percent of the value of the home or for more expensive homes the FHA lending limit (Stucki, p.20). For example, if you have a reverse mortgage loan for $150,000, your origination fee would be 2 percent, or $3,000. Under the new Act, the same loan for $150,000 would have an origination fee of 1.5%, or $2,250. And while the Bill that governs the Act has not passed just yet, the U.S. House of Representatives and the U.S. Senate have little differences to settle with reverse mortgages; therefore it is only a matter of time that the Bill will be signed by the president. Another important government feature of the reverse mortgage product is counseling. All borrowers must go through HUD approved counseling which is highly regulated. HUD counselors are trained to offer insight into whether the borrower is a good candidate for the reverse mortgage loan. The counseling program is independent of any lender and it is funded by the government. In September 2007, HUD distributed $3 million specifically for the HECM loan counseling program (www.nrmla.org/rms/default.aspx). This counseling service is free to the borrower and they can have as many counseling sessions as they need in order to make their decision. Generational Differences When the U.S. stock market crashed in October 1929, it brought financial hardship to the nation and the world. For millions of people jobs and food were scarce. The Greatest Generation, those born between 1911and 1924, witnessed this financial hardship firsthand. For many, the Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 14

15 mere thought of taking the equity out of their hard-earned home was ridiculous. Simply put, in their minds, debt was a very bad thing. Additionally this generation relied on pensions and Social Security to cover the costs of retirement and aging; therefore they did not often require additional income. Fast forward to today, in a time where private pensions are scare and Social Security is dwindling and eligible seniors are more open to the idea of reverse mortgage since they can provide financial peace of mind. The idea of using home equity to finance retirement is becoming increasingly more mainstream even among the current generation of seniors who have been traditionally debt adverse, says Peter Bell, president of the Washington, D.C.-based reverse mortgage lenders association (National Mortgage News, p.28). Also, baby boomers have been around to see the likes of second mortgages loans where the residential property is used as the collateral to obtain a second loan that can be used however the homeowner wishes. Additionally, the baby boomer generation is accustomed to having multiple credit cards, making them not as adverse to a reverse mortgage. Because of the sheer number of baby boomers and the fact that they are not as debt adverse, the reverse mortgage market should see a substantial pickup in the years to come. Media Influence Even though the reverse mortgage industry has made great strides to improve the reverse mortgage products by enhancing consumer protection, many seniors will always remember a reverse mortgage for what it was in the early days when it featured equity share and was not regulated by the government not for what it has evolved to today. According to a small media survey conducted in March 2008 for this guide, 20 seniors age years were polled about the media s influence in the reverse mortgage market. Of the seniors polled, 85 percent had a negative view of reverse mortgages largely due to the media. Some of the things they had heard about reverse mortgages on T.V. or read in a newspaper were: your house can be taken Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 15

16 away, the banks always wins because there are too many restrictions, there is a lien on the home with a reverse mortgage, and it s too good to be true (Appendix C). To combat this negative thinking, some of the larger reverse mortgage companies such as Financial Freedom and the Senior Lending Network have hired James Garner and Robert Wagner, both famous actors, to be spokespeople for reverse mortgages and their company. Because these actors are the same age as the target market seniors can relate to them better and also may view them as trustworthy. Some companies like Golden Gateway in San Francisco are taking a different route by creating catchy and convincing slogans such as Reverse Mortgages: A tool so valuable, with a promise of security so strong that it was developed and insured by the United State Federal Government (www.goldengateway.com). Although the reverse mortgage industry is seeking new ways through various media outlets to attract reverse mortgage program participants, seniors have to be careful about not taking media or advertising information at face value. Seniors have been subject to aggressive marketing through direct mail, celebrity endorsements, and free lunch seminars where the risks of reverse mortgage are glossed over and benefits are magnified, said Committee Chairman Sen. Herb Kohl (D-Wisc.), as part of a U.S. Senate Special Committee on Aging. Another committee member, Sen. Claire McCaskill, (D-Mo.), feels that seniors that take advantage of a reverse mortgage without the pressure of a sales pitch are in a better position to make a decision about whether a reverse mortgage is right for them (Theis, 2007). As the senior population continues to grow we will see heavy online media and print advertising as well as live and online seminars about reverse mortgages. If you haven t heard much about reverse mortgages yet, just wait for the media tidal wave to hit the public. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 16

17 Reverse Mortgage Limitations As promising as reverse mortgages sound, it s important to know and understand what its limitations are. While reverse mortgages can be a great alternative for seniors who want to remain in their home but need extra cash to do so, they are not for everybody. Here are the main reasons why. Reverse Mortgages are not free. In fact, they can be very expensive, with fees such as closing costs, monthly compounding interest, servicing fees, mortgage insurance and various other fees. All of these fees are discussed at great length in the second portion of this paper. Costs associated with a reverse mortgage are deferred so that your closing costs are automatically added to the original loan balance at the time the loan closes. According to Your Home For Life, the average closing costs for loans given to seniors in the New England area range from $6,000 to $17,000. Eric Schaeffer, a financial planner for Merrill Lynch in New York City, says he does not like the idea of a reverse mortgage mainly due to the compounding interest factor. Because there are no monthly payments on the reverse mortgage, the interest is building upon interest on a monthly basis. On another note, while the closing costs and other fees can be steep, that may not be a problem if you plan on staying in your home for a long time. Experts say it s important to stay for at least five to seven years to get your money s worth. But if you pass away or sell your home within a few years of taking out the reverse mortgage, those fees will have eaten up a decent piece of your home equity. The bottom line is that all costs are paid by the borrower, whether they actually use all of the money available to them from their reverse mortgage loan. For example, if your closing costs are $15,000 and you only stay in your home for two years, then you just paid a hefty fee for a small return on investment of only two years to remain in your home. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 17

18 Borrowers may run out of money. If borrowers are not careful and do not accurately forecast and plan for their long-term care needs, they may spend down the equity in a portion of their home and still not have enough money to cover the cost of high-level long-term care such as assisted living or nursing homes. Zoran Basich, an elder law attorney and operator of Nursing Home Solutions based in Pasadena, Calif., says that lenders make the reverse mortgage sound, too good to be true. In a recent interview for this paper, he said that the problem with reverse mortgage is that the lenders can t lend forever which could lead to the borrower running out of money. In addition, the lender criteria is not always good because the borrower could get ill and have to leave the home shortly after they received a reverse mortgage. For example, if the borrower falls ill and is placed in a nursing home, and is not able to come back to the home within a year, his/her home will have to be sold in order to pay back the reverse mortgage loan. To alleviate this problem, Mr. Basich recommends refinancing the home with a 30-year fixed second mortgage instead. Medicaid status could be affected. If a borrower is currently eligible for public assistance, such as Medicaid, a reverse mortgage loan could make them ineligible to receive monthly payments. Why? In order to be eligible for Medicaid, a borrower cannot have above a certain amount of money in their checking account on a monthly basis. For example, Mass Health, Massachusetts form of Medicaid, does not allow more than $2000 a month for a single person and $3000 a month for a couple in a Medicaid recipient s bank account (www.massresources.org). If they take a reverse mortgage loan and opt for monthly payments, they must spend the money each month or if they opt for a lump sum, they money must be spent right away. However, if a borrower opts for a line of credit where the reverse mortgage asset remains with the lender until the cash is needed, it obviates the concern about having too much money in Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 18

19 the borrower s checking account. A Medicaid eligibility specialist can help older homeowners determine if a reverse mortgage would put them at risk for not being eligible for Medicaid. Reduces the home equity amount you leave to your children or grandchildren. Many seniors today want to leave an inheritance to their children. This inheritance will be notably smaller if a reverse mortgage loan is taken out and assuming the home never appreciates in value. However, on the flipside, selling the home and then using the proceeds to cover the cost of long-term care will take a huge chunk of an inheritance, too. In summary, if you do not need extra money to meet your expenses and you do not plan on staying in your home for at least five years, then you are probably not a good candidate for a reverse mortgage loan. However, it s important to remember that while reverse mortgage fees may be high, selling your home and downsizing can cost even more with closing fees and packing and moving costs. This is why it s so important to weigh all your options when considering a reverse mortgage loan. Industry Scams Recently, the Financial Industry Regulatory Authority (FINRA) issued an investor alert warning seniors who are approached by a financial adviser to do a reverse mortgage to fund another financial investment that they are selling, to steer clear. The investment could be very risky and your cost on the loan could outweigh any gain on the financial investment you purchase with it. The financial companies may profit from both the reverse mortgage loan and the sale of the financial investment, giving them twice the incentive to go after seniors who are eligible (www.finra.org/pressroom/newsreleases/2008newsreleases/p038126). For example, according to a recent newspaper article in the Boston Globe on March 2, 2008, Erika Baker, who was 67 years old, divorced and worried about losing her job, took out a reverse mortgage from Senior America Funding, in San Diego, CA, for a little more than $200,000. The saleswoman that sold her the Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 19

20 reverse mortgage pressured Ms. Baker into putting the proceeds into complex investments that put the money out of reach. Because of this Ms. Baker only received about $33,000 in cash, far less than what she needed to cover expenses in her final years. Many industry experts also agree with FINRA. Mr. Schaeffer, of Merrill Lynch, highly discourages borrowers to take their reverse mortgage loan and purchase an annuity or other financial products with it. If a borrower spends his or her loan money on an annuity and it s a down market, he or she makes no money on the annuity and at the same time has to pay money for the reverse mortgage. Even in some cases where an annuity or another financial product earns interest, it still may not be enough to counteract the interest the borrower is paying on the reverse mortgage loan. In a recent Your Home For Life seminar in Woburn, Mass., at the Woburn Senior Center, Mr. Barrett stated at the beginning of the meeting that he does not agree in any way with a borrower using reverse mortgage money to purchase financial products. This was a relief to many of the 20 seniors that attended the seminar because they had heard negative things in the media about seniors losing everything because they purchased an annuity with their reverse mortgage loan. And lastly, because there are so many variables in helping seniors remain independent in their homes, it is very important for seniors to find a broker or lender that solely focuses on reverse mortgages, such as Your Home For Life. Reverse mortgages are complicated for many reasons, but especially because they crossover into the long-term care arena. Because of this organizations like the National Education Committee for the National Reverse Mortgage Lenders Association (NRMLA) are dedicated to promoting the understanding and use of FHA insured reverse mortgage programs through education. NRMLA acts as the national voice of the reverse mortgage industry, serving as an educational resource, policy advocate and public affairs center for lenders and related professionals. Their mission is to educate consumers about the pros and Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 20

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