cohen burns hard paul law firm



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West Hartford, CT
(West Hartford Center)
(860) 561-1036

191 Albany Turnpike
Collinsville, CT
(Rte 44, near the Shoppes at Canton)
(860) 693-1201

Contributed by Eric Hard and Suzanne Hard

Reverse mortgages, through which homeowners access their home equity as a source of income, are becoming a more viable and popular option for senior homeowners.

Home equity, particularly for older Americans, is a very special kind of asset. Historically, home buyers have worked diligently to pay off their mortgages and realize the dream of free and clear home ownership. This strategy has been an astute one for many reasons, including the tax deductions available on mortgage interest payments and the growth in real estate values over time. Consequently, home equity is often seen as an untouchable asset, and many seniors are committed to leaving their homestead, debt-free and unencumbered, to their heirs. In recent years, however, it appears that things are changing. Reverse mortgages have become a progressively more popular source of supplemental income for senior homeowners. Increasing numbers of seniors are exploring reverse mortgages. While back in 1990, the Federal Housing Administration (FHA) insured 157 Home Equity Conversion Mortgage (HECM) loans, that number was 43,131 in 2005 and 76,351 for Fiscal Year 2006. There are several reasons for this trend. First, more Americans are living longer and spending more years in retirement. Second, it is estimated that over 40 percent of working households may not have adequate savings and retirement income to fund their retirement. Third, reverse mortgage products are continuing to be developed at lower cost to the borrower and with greater consumer protections. As a result, reverse mortgages are a financial product of which every homeowner should be aware. Reverse mortgages are available to homeowners aged 62 and older. In the case of a married couple, the youngest borrower must be at least 62. People in this age group with almost no debt on their home can usually obtain 50 percent of their home equity in this fashion. The amount of equity available will vary with the value of the home and the age of the borrower: Generally speaking, the older the borrower and the more valuable the home, the greater the funds that will be available. Legislation to increase loan limits has passed recently, allowing even more of a home's equity to be available through reverse mortgage funding.

The income from a reverse mortgage is tax-free and can be received in the form of a lump sum, an annuity, a line of credit available for future use, or some combination of the three. The form of payment can be structured so as to have no impact on the borrower's eligibility for Social Security, Medicare or Medicaid benefits. Through this financing, consumers can use the accumulated equity in their home for any purpose, retain title, continue to reside in the home, and make no mortgage payments. No payments are made to the mortgagor until the borrower sells or moves out of the home, and repayment is then limited to the loan amount disbursed plus interest. The total amount owed can never exceed the value of the house. If the home sells for more than is ultimately owed to the lender, the money that remains after paying the transactional costs of closing, that difference, is retained by the homeowner. Also, should the home sell for less than is owed on the he mortgage, the lender absorbs the difference. This is non-recourse financing: To obtain payment, the mortgagor is limited to the sale price of the home. When considering a reverse mortgage, it is important for consumers to remember that there are costs associated with this financing, similar to those associated with obtaining any mortgage or home-equity financing. Also, the homeowner remains responsible for taxes, insurance and maintenance expenses. As part of the process of obtaining a reverse mortgage, the Federal government requires borrowers to receive counseling from independent approved third-parties (AARP, for instance). Counselors review the borrower's goals and available options for achieving those goals. Sometimes methods other than a reverse mortgage, such as local senior tax relief, will be more appropriate. Counselors help to educate the borrower on the costs and other economic implications of this form of financing.

Federal legislation is now pending that would allow reverse-mortgage financing to be used to purchase a new home. Amendments to the National Housing Act has passed the House and are under consideration in the Senate. Currently, borrowers who wish to secure such funding in connection with a new home must sell their house, buy the new one and get a reverse mortgage in separate transactions, all with separate costs. If the proposed legislation passes, consumers will be able to buy a new house and obtain a reverse mortgage in the same transaction, thus reducing their costs. This change in the law would help to make reverse mortgages a more viable option for those who want to use this type of financing but currently live in a home that no longer suits their needs.

While a reverse mortgage is not for everyone, it can be a useful financial resource in the right situation. As always, educate yourself and consult with professionals in making decisions for your financial future.

Copyright 2006 by Eric Hard and Suzanne Hard. All rights reserved.

Suzanne Hard is a lawyer residing in Avon, CT. Eric Hard is an attorney with the Law Firm of Cohen, Burns, Hard and Paul in West Hartford, CT Eric and Suzanne may be contacted at, or at 860-561-4961.


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