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Low upfront costs make new FHA reverse mortgage attractive

Dear Benny: I have been a student of retirement living since 1962, when I was an executive with one of the major developers of active retirement communities.

Among my findings:

1. There are hundreds of thousands of Americans living today in over-55 retirement communities. Very few of them are currently in financial trouble.

About 30 percent of them paid cash for their houses. Many others have only very small mortgages. Practically none had subprime mortgages, and few have negative amortization. Foreclosures are minimal.

2. About the only financial problem is that many seniors are “brick rich and cash poor.” I ran across one case years ago where an elderly widow had such a small income that she could not pay the $2 donation for Meals on Wheels.

But her $400,000 house was free and clear. If reverse mortgages had been in existence then, it would certainly not have been a last resort. Godsend would be more like it. She could have lived like a queen, albeit a modest one, for the rest of her life tax-free.

3. Lump-sum payments, I agree, may create real problems and should be “a last resort.” But I see a real advantage to many seniors in the way monthly payments are structured on the FHA program. They are based on average actuarial tables for life expectancy at a given age.

That means that some of us are going to die short of our life expectancy, and some of us are going to outlive our life expectancy.

The “early diers” are not disadvantaged because they have not used up much of their house’s equity. The “outlivers” reap a bonanza because their monthly payments are received as long as they live, even after their house’s equity is used up. This is guaranteed by the FHA’s mortgage insurance pool we contribute to monthly. This can go on for a long, long time.

My next-door neighbor, for instance, is 96, and she is not at all unique in our community. Had she taken out a reverse mortgage at age 65, she would have received 372 monthly payments by now (and counting). Talk about a win-win. –Kelly

Dear Kelly: I still am a strong believer that a reverse mortgage should be considered a last resort. However, new laws and a new FHA product are slowly changing my mind.

You used the concept “brick rich and cash poor.” My terminology is “house rich and cash poor,” although I like your phrasing better. I have had too many clients over the years who were in this category.

But the upfront costs of a reverse mortgage could not compete with a home equity line of credit, where you had to pay interest only when you tapped into that line. It basically gave you a checkbook to keep in your desk drawer until you needed the money.

However, last year Congress increased the loan limits on reverse mortgages to $625,000. Additionally, FHA announced a new version of the old reverse mortgage, which they call the HECM Saver (home equity conversion mortgage).

Although this new product does not allow homeowners to take as much money under the program as with the older version, the upfront closing costs are considerably lower.

If you are age 62 or older and have a house that is “free and clear” or only has a small mortgage, you may be a candidate for this Saver program. Do your homework, search “reverse mortgages” on the Internet and consult with your financial, tax and legal advisers before you make the final decision.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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