GERRY KRAMER: Reverse mortgages have appeal for seniors

Depressed home prices, low mortgage interest rates and an $8,000 tax credit for new home purchases have done little to spur the housing market. The glut of homes for sale, stricter terms to qualify for a mortgage and a cautious attitude toward committing to higher expenses in a continuing recession have acted as offsets to the incentives. Yet one area of strength in the mortgage market is that for reverse mortgages. Because there is a minimum age requirement of 62 to qualify for this product, its appeal is only to seniors.

A reverse mortgage simply allows the owner of an existing home that has equity (value above what is owed on any existing mortgage) to borrow against that value. This is not an equity line of credit. That product is in short supply these days, down some 70 percent from last year. In a reverse mortgage, the lender takes “effective” ownership of the home so that when the owner dies or sells the house the loan is automatically repaid from the proceeds of the sale. For this, the owner gets cash up front or a line of credit.

For example, suppose a home has no mortgage on it and is worth $200,000. A reverse mortgage can provide the home owner with up to $160,000 in cash or credit line.. This represents 80 percent of the equity value, generally the limit banks will accept. The actual amount provided will be less, however, because of interest charges over the loan’s life added to the principal amount owed so that the total continues below the 80 percent upper limit.

But that’s not all. The lender will charge a fee for the reverse mortgage in addition to interest. Fees can run as much as 10 percent of the home’s value, reducing further the actual amount of cash or line of credit. Also, falling home prices can make the home value appraisal difficult.

Still, a reverse mortgage can make sense for the retired individual with little or no savings other than the value of the home, especially in a market where selling to maximize cash value is a slow process. Just make sure all the costs, fees and obligations are understood.

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