Posted on 08/10/2003 6:25:23 PM PDT by Brian S
Sun August 10, 2003 11:44 AM ET By Aleksandrs Rozens
NEW YORK, Aug 10 (Reuters) - Hank and Betty Cahill, retirees in Osterville, Massachusetts, had no plans to use their home to borrow money, but that changed when Betty needed costly treatments for cancer.
The couple -- in their 80s and avid boaters in the waters around Cape Cod -- took out a "reverse mortgage" that pays them money each month.
"We could have done without it, but it would have been one hell of a strain," Hank Cahill said. "Things aren't cheap. Age catches up with you. You see your nest egg dwindling."
The Cahills are not alone. This year and last year, lenders specializing in reverse mortgages have seen their business boom.
Rising medical costs, an anemic stock market and paltry returns from bank deposits because of low interest rates have prompted more and more retirees to borrow money using their homes as collateral.
"Medical expenses are not an uncommon use, particularly home health care. This is a common way for people to use it," said Peter Bell, president of the National Reverse Mortgage Lenders Association, an industry trade group.
MECHANICS OF REVERSE LENDING
Reverse mortgages are available to homeowners who are at least 62 years old. Unlike typical mortgages, which require the borrower to make a loan payment each month, reverse mortgages provide the homeowner with a monthly check, or a lump sum payment.
Neither the principal nor the interest is repaid until the borrower dies or leaves the home.
This year, reverse mortgage lending has hit a record high, in part because of historically low interest rates and rising costs, such as medical expenses, for retirees.
Also, while stock portfolios lost value when the dot-com bubble burst in the spring of 2000, many retirees were reluctant to sell off their holdings.
"Many people found the value of their portfolios dropped. They did not sell, but decided to borrow against their homes," Todd Walters of Amston Mortgage Co. in Colchester, Connecticut, said.
Anyone applying for a reverse mortgage must meet with a loan counselor who explains how the loan works and helps the borrower decide if taking such a loan is a sound financial decision.
Then, a borrower's home is appraised, and a formula that considers the borrower's age, the home's value and prevailing interest rates determines how much money can be borrowed.
This summer, interest rates hit 45-year lows, allowing more retirees to borrow more money. Nationwide, a rise in home values also encouraged such borrowing.
REPAYMENT
A loan must be repaid when the borrower dies or moves out of his or her home. The borrower, or his estate, must repay the money advanced as well as accrued interest.
If the sum owed by the borrower is greater than the value of the home, the estate pays only what the property sells for. The U.S. Department of Housing and Urban Development insures such loans and makes up any shortfall.
Repaying a reverse loan can be a sticky situation for anyone looking to leave a home to their heirs.
"Some people are coming into the reverse mortgage market because their liquid assets and retirement portfolios have dropped," Amston's Walters said, adding that the stigma of not having enough money socked away for retirement has faded.
"Reverse lending has lost its negative look," Walters said.
The kids will likely howl bloody murder when their parents die poor.
The kids will likely howl bloody murder when their parents die poor. ***********************************
That is a very sad thought. It seems that a large # of kids
born in the late 40's and early 50's are waiting for their parents
to leave them fat and sassy with a big inheritence. I've heard this
from some of my own family members, needless to say, I don't talk to
them anymore. Nor do many other family members associate with them.
If "the kids" had any brains, rather than let a bank, ins. company, medicare or anyone else get their hooks into the property, they'd buy the house, possibly at a below market price, then give their parents life estate...
I agree, there is no reason that people should have to use their life savings for medical care in their old age. It is as if retirement money is being wasted on non-recreational needs. Uncle Sam should pay for their every need.
Exactly why? What is that old saying...
You can't take it with you..
Taking out a reverse mortgage is the only way many in the middle class will be able to monetize their savings as they age. Think about it. Mortgage payments are a large part of the savings of middle class Americans. The problem with savings vested in real estate is you can't spend it without severely changing your quality of life. This is actually a pretty good solution.
The problem I have is that the Govt steps in as an insurer. As far as I am concerned, if a bank wants dibs on your property, they should take the downside as well as the upside. It should be structured as an annuity, with the current market value of the home, discounted by the life expectancy of the individual and current interest rates. The bank should be "buying the property forward".
The seller benefits by receiving increased cashflow and the use of the property for the remainder of their lives.
I actually encourage with people, especially if they have ungreatfull and greedy offspring. The elderly are never forced out or evicted. Does not happen, they either pass away, or move out. This gives them a nice chunk of extra spending money, they can use it for a huge variety of things.
I knew one really sweet couple that used it and went on a nice vacation, invested the rest, made a bigger fortune, and wound up buying a new home better then the previous one.
Never the less, I fail to see how you would think this is a travesty for the elderly? I can understand why some of the children may feel strongly, but for the elderly, they are simply getting a nice check (or checks), untill they either pass away or if they chose to leave for somewhere else. If there is a negative here, I fail to see it, and in my years of real estate, I have yet to see this go wrong for anyone elderly who has done this.
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