One common misperception of reverse mortgages is that prospective borrowers can qualify for an amount equal to the value of their home, or at least the Federal Housing Administration (FHA) loan limit.
The actual reverse mortgage amount is substantially less than both those numbers, ensuring that there will likely be sufficient equity left in the home when the loan comes due.
This cushion between the value of the home and actual loan amount has become a hot topic, especially for seniors who have been deferring their property tax payments in housing markets that continue to go downhill.
For example, last year the Oregon Legislature passed several changes to its property tax deferral program, including the elimination of any tax deferral if the homeowner has a reverse mortgage. The consensus was that since the deferred taxes were paid by the state until the home seller died or moved away, not enough money would be left over after the reverse mortgage was satisfied to pay those taxes.
"There wasn’t much notice, and that surprised a lot of seniors who had been getting the deferral and could not afford to pay their property taxes," said Lynn Wertzler, president of Greenleaf Financial LLC, a reverse mortgage lender in Washington and Oregon.
"The state never offered any studies that we knew about, or estimated the number of homes where there would be a shortage because of a reverse mortgage and a tax deferral."
The fear among senior advocate groups is that more states will follow in Oregon’s footsteps without waiting for concrete evidence that the property tax deferral/reverse mortgage combination will sting state coffers. All states (except Massachusetts) that allow property tax deferrals for seniors have an annual renewal system.
In some states, the amount of equity in the home determines the amount of property taxes eligible for deferral. (For the deferral program, equity is the difference between the assessed value of the property and any debts secured by the property.)
For example, Washington homeowners must reapply every year for the deferral. Provided all qualifications are met (including adequate fire and casualty insurance) homeowners over the age of 60 with a household income of less than $40,000 may defer approximately 80 percent of their property taxes.
Deferred taxes are collected, plus 5 percent annual interest, when the primary owner moves out or sells the home.
Most reverse mortgage lenders work with the Washington State Department of Revenue in order to keep the deferral in place for seniors in need, according to Beulah Holman, DOR’s exemption and deferral administrator.
"Most of them understand it would defeat the purpose if all the funds from the reverse mortgage went to paying property taxes," Holman said.
A reverse mortgage is a negative-amortizing loan. That means as interest accrues and no payments are made, the amount owed is significantly greater than the original sum borrowed. The loans have enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment.
Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are tax-free and are not included in the annual household income under the deferral program.
A rough rule of thumb to estimate your maximum reverse mortgage loan amount is to use your age minus five years as the percentage you can take from your net equity depending upon how you take the distributions: lump sum, monthly draw, line of credit, or combination of those.
For example, if you are 75, with a $200,000 home owned free and clear, the maximum reverse mortgage line of credit you could expect to receive would be $140,000 before closing costs (70 percent — 75 minus 5 — of $200,000 is approximately $140,000).
Even if the slumping housing market has eroded the built-in cushion established by the reverse mortgage industry, most seniors with reverse mortgages have yet to sell. And, if they outlive the value of their home (draw out more funds than the house is worth), mortgage insurance makes up the difference.
Why eliminate, or curtail, any senior benefit until researched estimates are compiled — especially if we are at, or near, the bottom of the market?
It would make sense to first tie the program to an annual equity gauge before forcing seniors to pay up or move. Simply assuming that all those with reverse mortgages will soon have no equity is ludicrous.