It's payback time: With a reverse mortgage, the lender pays the senior-citizen homeowner

Are you a homeowner age 62 or older who could use more tax-free income for the rest of your life? Or perhaps you need cash for home repairs, such as a new roof, a new car or even a vacation cruise. If that isn't your situation, a parent, relative or friend may fit this description.

When I began writing about reverse mortgages for senior citizens 27 years ago, I never dreamed it would become a lifetime career. Back in the 1970s, only two S&Ls and one bank, in Ohio, Maine and Minnesota, offered lifetime tax-free reverse mortgage incomes to senior-citizen homeowners.

Today, reverse mortgages are available to seniors in all 50 states (Texas came on board in December 2000). Three major nationwide lenders now offer an array of lump-sum, credit-line and lifetime monthly income reverse mortgages.

Lender pays the borrower

Unlike a traditional mortgage, or home-equity line, which requires monthly repayments from the borrower to the lender, a reverse mortgage requires payments from lender to borrower.

The homeowner need never make repayments to the lender. Isn't that nice? The reverse-mortgage balance grows, secured by a first mortgage or deed of trust on the residence. The amount available depends on the homeowner's age and the residence's market value. Owner-occupied houses and condos are eligible.

The lender's payments to the homeowner never need be repaid until the senior citizen permanently moves out of their residence, such as by selling or dying.

Even if the homeowner lives to 120, and if the reverse-mortgage balance exceeds the home's market value, the homeowner never has any personal liability to the lender. The sole security for repayment is the house or condo.

When the loan "matures," mortgage repayment is usually made by selling the residence. Or if heirs wish to keep the home, it can be refinanced to pay off the reverse mortgage.

The older, the better

The homeowner's income and credit are irrelevant for obtaining a reverse mortgage. Of course, the homeowner can't be in bankruptcy. But a modest existing mortgage balance is all right. Because reverse mortgages must be a first lien on the property, any existing mortgage must be paid off from reverse-mortgage proceeds.

What matters most are (1) the market value of the residence and (2) the age of the owner or owners. If title is held by a husband and wife, the age of the youngest spouse must be at least 62. For calculating reverse-mortgage eligibility, the youngest spouse's age and life expectancy are used.

The result is that the older the homeowner, the greater the amount of available reverse-mortgage money. For example, if you are a 90-year-old homeowner, you can receive larger reverse-mortgage payments than a 65-year old.

Who benefits?

If you are at least 62, own your home and have a mortgage balance less than 40 percent of your home's market value, you can benefit from a reverse mortgage.

To illustrate, you use a reverse mortgage to pay off your existing mortgage to eliminate monthly mortgage payments. This will increase your net cash flow from Social Security and other sources.

Of course, the more home equity you have, the greater will be your reverse-mortgage benefits. Surprisingly, most reverse-mortgage homeowners do not elect the monthly income plan. Instead, they select either the credit line or the lump-sum option.

Three major lenders

There are three major nationwide reverse-mortgage lenders. Each offers a different plan.

The most popular is the FHA (Home Equity Conversion Mortgage) program, which accounts for about 90 percent of reverse mortgages. However, the $219,000 maximum, lower in some areas, limits the practicality of these loans in high-cost areas.

The second most popular reverse mortgage is the Fannie Mae "Homekeeper." Its maximum is currently $275,000. In Hawaii and Alaska, that limit is doubled.

The third most-popular reverse mortgage is the Financial Freedom Plan, which goes up to $1 million, sometimes higher. This program is ideal for high-value residences.

Finding reverse mortgages

Reverse mortgages are originated locally. If you obtain an FHA (HECM) or Fannie Mae reverse mortgage, you will be required to complete a very worthwhile counseling course to be certain a reverse mortgage is right for you.

Major nationwide local reverse-mortgage originators include Wells Fargo Mortgage and Financial Freedom Plan. Smaller regional and local mortgage brokers and mortgage bankers also arrange reverse mortgages.

The best way to locate a local reverse-mortgage lender is at www.reversemortgage.org. This Web site is sponsored by the National Reverse Mortgage Lenders Association.

Reverse-mortgage pioneer and AARP adviser Ken Scholen's Web site, www.reverse.org, includes a calculator to compare FHA (HECM) and Fannie Mae reverse mortgages. The www.financialfreedom.com site compares all three nationwide lenders.

The downside

If you plan to leave your home free and clear to your heirs, forget about a reverse mortgage. It will reduce the home equity available for inheritance.

Because of the upfront loan fees, much like those on a traditional home loan, senior citizens who don't expect to remain in their homes at least five years should not consider a reverse mortgage. The fees on a short-term reverse mortgage will result in a high interest cost for just a few years.

Reverse-mortgage lenders are required by federal law to provide borrowers with a Total Annual Loan Cost (TALC) calculation. TALC shows the average annual interest rate for (1) the first two years, (2) at the borrower's life-expectancy age, and (3) at 40 percent beyond the borrower's life-expectancy age.

Obviously, the longer the homeowner lives in the home, the lower the reverse mortgage's annual interest cost.

Homeowners receiving Supplemental Security Income or Medicaid should be aware that if they don't spend their entire reverse mortgage lump sum or monthly proceeds by month's end, they could have their benefits reduced. But Social Security and Medicare payments are not affected by the nontaxable reverse-mortgage payments received.

A perceived reverse-mortgage disadvantage is that senior-citizen homeowners will be spending their heirs' inheritance. That's correct. But where does it say, "Thou shalt leave a huge inheritance to thy heirs and must never enjoy thy home equity"?