This column first appeared in the San Antonio Express News and other Hearst Newspapers on February 4, 2019.
Dear Mr. Premack: I am over 65 but my wife will not be 65 for another 5 years. I have been told both must be over 65 in order to qualify for a reverse mortgage. My financial standing is very good. What can I do to get a reverse mortgage? NSC
Reverse mortgages are a special type of home equity loan, which was illegal in Texas until the mid-1990’s. The legislature and voters had to actually amend the Texas Constitution to allow both general equity loans and reverse mortgages.
The Texas Constitution does have an age requirement, but your friend had incorrect information. Instead of age 65, reverse mortgages are available to homeowners who are 62 or older. Only one of the spouses need reach that age for both to qualify. If you are 62 or older but your spouse is not, you can still apply for a reverse mortgage. **(See comments at the end of this column for further discussion).
You may see advertising for reverse mortgages which encourage Seniors to make use of the value locked up in their homes to enjoy a more happy and full life during retirement years. All the advertising is, of course, simply a way for the banks to make money (would they do this for you if it wasn’t profitable?). Specifically, the bank charges interest on the amount you borrow until the loan is repaid.
Ah, yes, you say, “but the loan does not need to be repaid until we both die” so the picture for us is very rosy. That is also a misunderstanding of reverse mortgages. The loan can be called due by the bank at the earliest of these events: a) when all borrowers have died (just like you thought), or b) when the homestead is sold or transferred, or c) when all borrowers move out of the homestead for 12 months without advance permission from the lender, or d) if the borrower fails to maintain the property or pay their local property taxes or obtained the loan fraudulently or tries to get another loan that would jeopardize the bank’s lien.
So, you see, the reverse mortgage loan could come back to bite you. What if you both need to move to a nursing facility? You must get permission from the lender, or the loan is called due. What if you would like to exercise your legal right to defer your property tax payments? Sorry, that would be default under your reverse mortgage. What if you decide to gift title to your home to your son, who has lived there with you for many years? Sorry, that is a transfer which calls the loan due.
You must also understand that when you first obtain a reverse mortgage, there is a limit on how much the lender will authorize. These figures are estimates, but if your house is worth $250,000 the lender will only authorize a loan of about $170,000. Why? Because as the months and years pass, the lender is accruing interest on the outstanding balance. If you borrow that $170k and live ten years, the bank gets paid about $245k when the loan is due (and I did not calculate compound interest, but the bank will).
Consequently, a reverse mortgage can put you at risk of losing your home (if you default or move out) and will certainly strip your heirs (adult children?) from receiving any value from your home. Before you take a reverse mortgage, talk to your attorney, your CPA, and other independent financial counsel. The reverse mortgage could, under limited circumstances, be helpful to you. But most likely it could do long term damage to you or to the family members who you leave when you die.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues.