What can you do if you're a senior citizen who needs money to pay your bills, but your dollars are locked in the walls of your high-priced house?
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One answer: Sell the house, move to a cheaper place and use some of the house profits for living expenses.
Some seniors, however, are determined to stay put. Some of them are turning to reverse mortgages, which let older homeowners borrow against the value of their house without having to repay the loan until they leave.
"They make sense for a lot of people," said Michael Miller, a reverse-mortgage counselor with the Consumer Credit Counseling Service of New Jersey in Cedar Knolls.
But that doesn't mean they're always the right answer. The start-up fees are high, and choosing the best deal takes a bit of shopping around.
These concerns scare away a lot of people. Several North Jersey financial advisers said they had clients who considered reverse mortgages, but decided to pass. In the words of planner Karl Graf of Ramsey: "Some have looked; none have leaped."
Reverse mortgages, said Graf, "create uncertainty in the one piece of their financial life that's totally certain, which is 'My house is paid off.'Ÿ"
Still, the loans are gaining more acceptance.
About 40,000 government-backed reverse mortgages were written last year, including 1,458 in New Jersey. That compares with 21,634 nationally in 2003, including 820 in New Jersey. (About 90 percent of reverse mortgages are backed by the government.)
And, as baby boomers age and home values rise, more borrowers are expected to turn to reverse mortgages.
"People are living longer, and they have to take care of their own retirements because companies are cutting back on traditional pensions," Miller said.
Reverse mortgages are available to people who are at least 62 and own their homes. The loan can be taken as a line of credit or a lump sum, or in monthly payments for a fixed period or for life.
The line of credit is the most popular, in part because it allows homeowners to borrow the money as they need it. And the line of credit grows over time, allowing the homeowner to keep up with inflation. The other loan amounts do not increase.
Interest rates are usually adjustable, either monthly or yearly.
By far the most popular loan is the Home Equity Conversion Mortgage (HECM), which is backed by the federal government. In northern New Jersey, the maximum amount that can be borrowed through an HECM is $312,895, though lenders won't lend anywhere near the full value of the house.
Fees on a typical loan in North Jersey, including insurance and origination fees, will usually top $15,000, Miller said.
The loan must be repaid when the owner dies, moves or sells the home. Whatever is taken out in a reverse mortgage will not be available later, either for the elderly homeowners or their heirs. So if the homeowner takes out most of the equity through the reverse mortgage, the heirs will be left with little or no equity when the homeowner dies.
In most cases, a homeowner can only borrow a set amount, determined by a formula based on the house's value and the homeowner's age. But homeowners can choose monthly payments for life. In those cases, the lender takes a risk that the homeowner will live so long that he collects more than the house is worth, because lenders can't demand repayment beyond the house's value.
One important caveat: Reverse mortgages are not for people who are likely to move within a few years. Because of the high origination fees, these loans are only worthwhile if you can spread those costs over many years.
For those unwilling to take on a reverse mortgage, one alternative is a home equity loan. Such a loan is cheaper than a reverse mortgage, but many older homeowners don't have enough cash flow for the monthly repayments.
More commonly, seniors decide instead to sell the house and move to a smaller place.
For many people, moving makes more sense, both financially and for their lifestyles. Move to a one-story house, and you don't have to worry about stairs. Go to an apartment or condo, and someone else mows the lawn and fixes the leaky faucet.
But moving has drawbacks, too. Real estate agents' commissions and other costs add up, and some seniors just find the whole idea too stressful.
"People reach a point in their lives where they're overwhelmed with the thought of moving," said Timothy Watters, a Ramsey financial planner.
Usually, this point occurs sometime between the ages of 75 and 85. "Even if it's logical to sell the house at that point," he said, "a lot of these people just can't do it."
Kathleen Lynn's column on Personal Finance appears Wednesdays in The Record.
Source: North Jersey Media Group
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