Article:
Reverse mortgages aren't the only option for seniors
Original location:
http://www.latimes.com/business/investing/la-re-lew11-2008may11,0,4115068.story
Los Angeles Times
By Lew Sichelman
Published: May 11, 2008
WASHINGTON -- Reverse mortgages are one way for house-rich but cash-poor seniors to tap into their equity without having to sell. But there are other options to consider as well.
A reverse loan is intended to enable people 62 or older to convert part of the equity they have built up in their homes into tax-free income. The name is appropriate because it works backward. Instead of paying the lender every month, the lender pays the senior homeowner -- monthly, in one lump sum, in amounts as the need arises for cash or in a combination of these choices.
The amount of money is based on current interest rates, lending limits, the equity in the home, age and how long the owner can be expected to live.
No payments are due while the reverse mortgage is outstanding. It is repaid when the borrower (or, in the case of couples, the last remaining spouse) dies, sells the house or no longer occupies it as a principal residence.
The borrower can never owe more than the house is worth, no matter when he or she gives it up or whether its value has gone down. If the owner dies and the place sells for more than what is owed on the loan, the excess (after sales commissions and other selling expenses, of course) goes to the borrower's heirs or estate.
The knock on reverse mortgages is that they are expensive. But some state and local governments offer less costly versions called deferred payment loans. Generally, there are no origination fees, and insurance premiums and closing costs, if any, are very low.
The rate on these loans is low as well, if interest is charged at all. When charged, it is often on a fixed basis, meaning the rate never changes. Better yet, many programs charge simple, rather than compound, so interest isn't charged on interest. Some even forgive part or all of the loan if the borrower remains in the house for a specified period.
Typically, seniors can only use deferred payment loans to make specific types of repairs or home improvements such as roofing and heating. But many will cover accessibility modifications such as ramps, rails and grab bars, and energy-efficiency improvements, including storm windows, insulation and weatherstripping.
These loans aren't available everywhere, and eligibility rules vary. Most are limited to homeowners with low or moderate incomes. And many place a limit on the home's value. Some have minimum-age or disability requirements.
Deferred payment loans go by many different names, so they may be difficult to find. Contact your city or county housing department, area agency or county office on aging, or the nearest community action or community development agency. Also try your state housing finance agency.
Other options to consider:
- Accessory apartments: Many owners bought their homes years ago when they needed space to raise their young families. Now, even though their houses are too big, they don't want to move. By turning a section or a floor into an apartment, they can bring in some extra money and perhaps gain some companionship or get help with chores.
Sometimes known as "in-law suites" or "granny flats," accessory apartments are completely separate, private living quarters contained within a larger home. They contain at least a mini-kitchen and a bathroom, and sometimes have their own private entry.
- Elder cottages: An arm's-length version of accessory apartments, elder cottages are small, separate units added in the side or backyard of a house owned by a family member.
Elder cottage situations allow older adults to remain somewhat independent in their own homes. Typically, the units are small, relatively inexpensive manufactured houses that can be removed when they are no longer needed.
- Sharing: There are benefits to having a roommate. Occupants can have their own private, personal spaces but share common areas.
Still, having a roommate isn't for everyone, so weigh the pros and cons carefully.
Lew Sichelman can be reached at lsichelman@aol.com.
