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Reverse mortgages have gotten even better

Updated: May 3, 2013 12:14PM

There's good news for seniors who own their homes, and want to continue living in them in spite of higher property taxes, utility bills and other costs. Reverse mortgages, which allow seniors to turn their home equity into a tax-free monthly pension check, have become more attractive. Competition means there are better deals and lower rates.

First, a reminder of how reverse mortgages work. Any senior age 62 or older who has a fully paid mortgage, or only a small balance remaining, can obtain a reverse mortgage -- a withdrawal of the equity in their home, on a tax-free basis.

This is a scary concept for the frugal seniors who have spent a lifetime paying down the mortgage, and don't want to be in debt. They worry about the possibility of losing their home. But let me stress that reverse mortgages enable you to remain in control of your property, and permit you to sell at any time. Your home is your home

The loan is only repaid when you sell, move out, or die. And no matter how long you live, you can't be forced out of your home.

Take a deep breath. Here's how it works. The amount you can get depends on your age, interest rates and the current appraised value of your home.

These funds are distributed to you tax-free -- either as a lump sum (for example to pay off a mortgage balance), a line of credit or as lifetime monthly checks -- depending on how you set it up. The older you are, and the lower the interest rate, the more money you are eligible to receive.

Interest accumulates only on the funds you withdraw over your lifetime. You make no payments to the lender.

The money you withdraw is yours to spend for any purpose. Upon sale -- which occurs only if you die or choose to move and sell -- any remaining equity goes to you or your heirs.

You or your heirs can never owe more than the house is worth, no matter how long you live and receive those monthly checks. The bank is protected against the possibility that you live longer than expected by FHA mortgage insurance on most reverse mortgages.

FHA reverse mortgages have county-specific lending limits that cap the amount of equity available. There are also "jumbo" reverse mortgages for those with higher-valued homes.

These jumbo reverse mortgages typically require the borrower to take a lump sum instead of monthly checks, but the fees are generally lower than those on FHA reverse mortgages.

The fees involved in FHA reverse mortgages average 5 percent of the property value, so you should only consider this option if you plan to stay in your home for more than a few years.

Reverse mortgages require independent counseling before they can be finalized, a task frequently handled by AARP and other not-for-profit counselors.

Pat Donohue, a certified senior adviser with First Reverse Financial Services, said seniors are about to get more choices and better options in reverse mortgages.

He noted that Bank of New York recently offered a new, lower rate on the most popular FHA product, the Home Equity Conversion Mortgage. Until now, the HECM had a monthly adjustable interest rate that was 1.5 percentage points above the one-year Treasury note rate. Starting this month, the BNY product will charge only 1 percent above the T-note rate.

That half-percentage-point cut could add anywhere from $3,000 to $14,000 to the amount that could be withdrawn.

Other lenders, including Financial Freedom, are announcing new products to compete with Bank of New York.Online calculator

To see how much money you might receive in a lifetime monthly check from an FHA reverse mortgage, go to www.ReverseMortga, and use the online calculator.

Don't let fear or complexity deter you from considering a reverse mortgage. For seniors who love their homes, this is the reward for a lifetime of mortgage payments. And that's the Savage Truth.

Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at, and click on Business. Distributed by Creators Syndicate.

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