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Reverse mortgage might ease burden of fixed income


Q My parents are living on a fixed income. Lately, their monthly expenses have begun to exceed their income. The only real asset they own is their home, which is paid off. It is not important to me to inherit their house, but I also don't want to have to subsidize their income if I don't need to. How could they use the equity in their home to augment their cash flow, without selling it?

A People aged more than 62 years control a significant portion of the wealth in this country, but like your parents, much of their wealth is concentrated in the equity in their homes. If Social Security benefits are excluded, just less than half of all senior citizens would fall below the poverty line based on their income. Inflation continues to drive up the costs of food, energy, and, particularly, health care, so it is no wonder that your parents believe things are tighter than they were 10 years ago. Also, federal budget cuts have pushed the cost of many programs down to state and local governments, driving up sales taxes and property taxes. These taxes, particularly the sales tax, tend to be regressive and really clobber retired people living on Social Security and limited resources.

The problem seems intractable. Seniors no longer work, and if they went back to work, they probably would not return to the work force in high-paying positions, so an increase in income through additional labor is unlikely. Without additional earnings from labor, additional savings will be all but impossible.

Reverse mortgages literally are mortgage loans that work backwards. They also seem to violate most of the traditional principles of good lending practice, but more on that later. Under a reverse mortgage, instead of sending a check to the lender every month to pay interest and reduce debt, the borrower receives a check every month from the lender and sees his or her debt increase. Reverse mortgages vary from lender to lender, but most have several characteristics in common.

First, they are only available to senior citizens (the definition of the age at which one is considered a senior may vary from 62 to 70 years) who own their own home with little or no debt. Next, the type of loan is usually either a term loan (with the term based on the life expectancy of the homeowner or a certain time period) or a line of credit.

The amount of the monthly payment depends on the term of the loan, interest rates, the value of the home, and the percentage of current equity eligible to be loaned out. With a line of credit arrangement, there is no monthly check; the senior merely taps the line of credit for cash whenever necessary. Generally, the loan is not repaid until the house is sold or at death.

The risks to the lender are obvious. With a loan based on life expectancy, the lender could loan more than is possible to recover on sale. There is no current cash inflow.

The risk to the homeowner is also clear. The loan will eat away-and could wipe out-the value of the home. If the senior wanted to pass the home on to the next generation, that generation may be saddled with a sizable debt.

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