Home Equity Conversion Mortgages (HECMs) may be a good choice for some seniors who fear they might outlive their retirement funds and will need cash to enjoy their remaining years. But they aren’t the only options elder owners might want to consider.
HECMs, aka reverse mortgages, are made to owners 62 years and older who have built up significant wealth in their homes. You borrow against a percentage of that equity, and draw the funds either in one lump sum or in monthly payments. Better yet, nothing has to be paid back until you pass away, or you permanently move out of the house.
Sounds appealing, and it is. But reverse mortgages are not cheap, and you still have to pay your property taxes and homeowner’s insurance. Otherwise, the lender can and often does initiate foreclosure proceedings.
But you can accomplish pretty much the same thing by choosing a less costly version of a reverse mortgage, sponsored by state and local governments, called a deferred payment loan (DPL). Generally, there are no origination fees, and insurance premiums and closing costs, if any, are very low.
Typically, seniors can use these loans only to make specific types of repairs or home improvements, such as roofing and heating. But many programs will cover accessibility modifications such as ramps, rails and grab bars, and energy-efficiency projects like storm windows, insulation and weatherstripping.
The interest rates on DPLs are low as well, if interest is charged at all. When it is, it’s often on a fixed basis, meaning the rate never changes. And many programs charge only simple interest as opposed to compound. Some plans even forgive part of, or the entire, loan if the owner remains in place for a specified period.
King County, Washington, offers loans of up to $25,000 at zero interest. No payments are required, and the loan need not be paid back until the house is sold, transferred to a new owner, is no longer your primary residence or you take out a home equity loan. Bloomington, Minnesota, offers loans of up to $35,000. Interest accrues at an annual rate of 2 percent for 10 years, but no payments are necessary until the place is sold, refinanced or conveyed to someone else.
DPLs aren’t available everywhere, and eligibility rules vary. Most are limited to owners with low or moderate incomes. Many jurisdictions place a limit on the home’s value and confine the opportunity to certain geographic areas. Some also have a minimum age or disability requirement.
These loans go by different names, so they may be tough to find. Check with your city or county housing department, your local office on aging, or the nearest community action or development agency. Also try your state housing finance agency.
Another public-sector version of the reverse mortgage is a property tax deferral (PTD) loan. Generally, it provides annual advances that must be used to pay all or some of your property taxes. But no repayment is required for as long as you live in the house.
In some places, but not all, PTD loans are offered on a uniform, statewide basis. Eligibility rules also differ from place to place, and most have a minimum age requirement of 65 and are limited to owners with low or moderate incomes.
In Cook County, Illinois, the income limit is $50,000, and you must have lived in the house for at least three years. In Wisconsin, the income limit is $20,000, but the residency requirement is just six months.
To find out if your state offers PTDs, contact the agency to which you pay your property taxes.
Seniors may also be eligible for monthly Supplemental Security Income (SSI) benefits if their liquid resources -- cash and savings -- are less than $3,000 per couple or $2,000 for an individual.
Your home and car do not count as resources under SSI, but your monthly unearned income cannot exceed $924 for a couple or $623 for an individual. Income limits are higher if you are employed or live in a state that supplements SSI.
If you meet the rules, you may automatically qualify for other public benefits that could allow you to postpone the need for a reverse mortgage. That way, if you do take out a HECM later, you may be able to receive a larger advance because you will be older and your property may have increased in value.
The National Council on Aging sponsors a website, benefitscheckup.org, that will locate public benefit programs that could pay for your prescription drugs, health care, utilities and other essentials. The site also explains how to apply for more than 1,150 programs available in all 50 states and the District of Columbia.
NEXT WEEK: Housing options.