Home care aide Joann Milam folds Nancy Rutherford's laundry in Springfield last month. Purchasing Long Term Care Insurance for your parents can relieve a lot of stress and avoid crippling costs.
Updated: May 3, 2013 12:14PM
Buried in the new Housing and Economic Recovery Act is some very good news for seniors whose main asset is the family home. The new law makes it easier and less expensive for seniors to access the cash value of their homes on a tax-free basis through a reverse mortgage. And it expands the amount that can be borrowed.
Let me make it clear that reverse mortgages had nothing to do with the mortgage mess. They are a safe and easy way for seniors to maintain control and ownership, while tapping equity for tax-free cash.
Now there will be a higher borrowing level on FHA reverse mortgages -- with $625,000 of home value as a cap, and a $417,000 borrowing limit. And fees will be capped at 2 percent of the first $200,000 borrowed, and 1 percent on the balance -- with an absolute maximum of $6,000 in fees.
These rules apply to FHA mortgages, which insure lenders against homeowners sticking around longer than anticipated. Other lenders provide "jumbo" reverse mortgages for higher amounts, taking larger fees to offset risk. There is no risk to the homeowner, who gets the money -- and the house -- for as long as they choose to live there.
How they work
A reverse mortgage may be the answer for seniors who want to stay in their homes but have a cash flow problem. They can get a monthly stream of income, or a lump sum, tax-free. Their ability to access the equity in their home does not depend on their ability to repay.
In fact, the reverse mortgage is not repaid until they move and sell the home, or until they die and their heirs either sell or refinance.
The most important aspect of a reverse mortgage is that the homeowner retains title to the home and can never be forced to move out, no matter how long he or she lives. And they -- or their heirs -- can never end up owing more than the house is worth, no matter how much money is withdrawn.
How much can you get?
The amount the homeowner withdraws depends on: the value of the home, the amount of remaining mortgage, the homeowner's age and interest rates.
A variety of banks and financial firms have created their own reverse mortgage products recently. Standard FHA reverse mortgages typically provide a monthly check, or a combination of a lump sum and a line of credit.
Other products let seniors with more expensive homes withdraw a larger lump sum and deposit the cash in their own money market account. Each has its own variables, making them difficult to compare. Until now.
Comparing the deals
Now there's a terrific new way for seniors to compare the various specific products, costs, and interest charges to find the best offering for their situation.
At GoldenGateway.com -- a site devoted to reverse mortgages -- there's a calculator to compare products and withdrawal amounts. Just input your age, ZIP code and estimated home value, as well as your current mortgage, if any.
The calculator instantly shows you the products you are eligible for.
The calculator even projects where you'll be financially in five to 20 years. Pick the time frame, and with a click you'll see how much you'll have borrowed out of your equity using each product.
You also get interest paid, fees paid and equity remaining in your home.
Yes, housing prices will rise again over the next 10 or 15 years, offsetting some or all of your reverse mortgage withdrawals. You can calculate based on a 2 percent annual appreciation, or raise that to a more realistic 4 percent or 6 percent.
So while you take equity out, the house is likely to appreciate.
As you view the numbers, you can call Golden Gateway toll-free at (800) 466-6394 for an explanation of the terms and comparisons. This service gathers information from all of the major providers of reverse mortgages and helps you find the product that best suits your needs.
They'll help you with the application process. They'll even show seniors who want to downsize and sell their old, larger home how to use a reverse mortgage to help pay for a new, smaller home.
Think of a reverse mortgage as the key to a vault. It unlocks the equity in your home, allowing you to stay in your home or even downsize -- without going into debt.
Done right, it will make you (or your parents) feel great. How do I know? I arranged one for my dad. Now I get to enjoy his independence as much as he does!
And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.