A Home Can Be Financial Lifeline For The Elderly

Although politicians boast of balancing the budget, many a Baby Boomer’s auto bumper still bears a sticker telling fellow motorists: “We’re Spending Our Children’s Inheritance.”

For the older set, the implication continues to be that spendthrift Social Security and Medicare entitlements are a mortgage on junior’s future.

Whatever the merits of this complaint, one type of mortgage that is finding increased popularity among older Americans does exactly what has boomers so concerned. “With a so-called reverse mortgage,” says financial agent Dana Burns of Spokane, “you are spending your kids’ inheritance.”

Burns, who specializes in reverse mortgages for Minneapolis-based Norwest Mortgage Co., says this different kind of home loan can be a financial lifesaver for elderly folks in need of extra income to continue living independently in their own homes.

There are, she says, three kinds of reverse mortgages: Federal Housing Administration (FHA), Federal National Mortgage Association (Fannie Mae), and a Jumbo TransAmerica reverse loan.

You must be 62 or older to be eligible.

Although she works with a wide range of older individuals and married couples, Burns says the typical client in this market is a widow, 73, who owns a home free and clear with an appraised value of about $120,000.

The maximum amount a homeowner can borrow is based on a formula that factors in owner equity, current interest rate (6.79 percent at the time of this writing), the homeowner’s age, and the geographic area.

Applying FHA’s formula and using a 73-year-old widow as an example, Burns calculated that the maximum reverse mortgage loan amount this client can secure is $55,810.38.

The homeowner can tap that equity in these ways:

A line of credit for the full amount.

Cash up front at closing.

A lifetime payment of $419.67 a month.

Or a combination of the above. For example, $10,000 cash up front plus a $45,819.38 line of credit, or $10,000 cash up front and a $344.47 monthly payment for life.

Whatever the payout, the homeowner gets to live in the house free for the rest of his or her life, if they wish.

The homeowner still owns the home, still has to pay the homeowner’s insurance premiums and taxes.

The mortgage note doesn’t have to be repaid until the owner or owners both die, or until the house is sold. At the time of death, the heirs can refinance the home and pay off the loan. Or they can sell the house. Or they can let the mortgage company take the house.

“The only assets the mortgage company can take to pay off the loan in the end is the house itself,” says Burns. “The mortgage company doesn’t go after any other assets of the estate.

“It’s basically a very special loan,” says Burns, “that is designed specifically to help enable older people to stay in their own home. The older a home owner is, the more money they can get in monthly payments based on mortality tables.”

If the borrowers are a couple, both must be at least 62. The amount of the payment is based on the age of the youngest coowner of the property.

“That’s because, when one dies, the other can continue to live on in the home and collect monthly payments under the existing agreement,” Burns explained.

Homeowners who outlive expectations get the best deal.

Not all financial counselors and money managers look with favor on this topsyturvy home loan. They advise anyone considering a reverse mortgage to explore alternatives such as refinancing, or selling the home outright for more money. But, of course, older parties who take either of these courses will no longer possess a home free and clear in which they can live out their lives.

It’s necessary, says Burns, to own a home free and clear or have a very small mortgage balance for the math of this reverse mortgage to work well.

, DataTimes MEMO: Associate Editor Frank Bartel writes on retirement issues each Sunday. He can be reached with ideas for future columns at 459-5467 or fax 459-5482.

The following fields overflowed: CREDIT = Frank Bartel The Spokesman-Review