LAFAYETTE, Ind. -- Recent federal and state rules that require elderly homeowners to get professional advice before taking out a reverse mortgage is making the deals less risky, a Purdue University expert said, but seniors still need to shop around.
"Check the fees or a senior could wind up with less income than hoped for," warned Flora Williams, an associate professor of family and consumer economics at the Indiana school and a certified financial planner.
Counseling now is required by the U.S. Department of Housing and Urban Development before a homeowner can take out a reverse mortgage. Most states have adopted similar requirements, said Williams, who recently completed a study of reverse mortgages published in the journal of the Association for Financial Counseling and Planning Education.

Income boosted 13-19 percent

Williams analyzed the income potential for 639 seniors with an average age of 72, who owned paid-off homes with an average value of $88,587. She found they could increase their monthly income from 13 percent to 19 percent.
Williams said the average seniors in the study would have increased their monthly incomes by $427 each -- about $4.82 per $1,000 of value -- if they had borrowed on a fixed, 10-year reverse mortgage. If they had opted for a lifetime payment they would have received a monthly income of $305 -- about $3.44 per $1,000 of value, Williams said. She explained that seniors make the choice of term based on how long they expect to live.
Williams explained that by tapping their home equity, seniors can pay anything from medical bills to regular living expenses with the monthly income provided by a reverse mortgage. "I think we may be doing seniors a disservice by not providing more information about them," she said.

Alternative to long-term care insurance
She added that insurance companies may not like reverse mortgages because it denies them the chance to sell long-term care insurance, which can become quite costly in senior years. "I believe a reverse mortgage is a reasonable alternative to long-term care insurance," she said, provided mortgage fees are not unreasonable.
Williams said seniors should be aware that a mortgage company may try to impose a variety of fees for servicing the mortgage. Among them, an origination fee of 1 percent of the adjusted property value, or a flat $1,500 fee, as well as a mortgage insurance premium equal to 2 percent of the adjusted property value, in case the home sells for less than expected after the homeowner dies.
Unlike a traditional home equity loan, the borrower in a reverse mortgage must be least 65 and does not repay the money. Instead, the homeowner remains in the house and receives income until he or she dies, Williams explained. At that point the loan is terminated, the home is sold and the bank is repaid, with interest, from the sale of the home.

Pluses and minuses of reverse mortgages
Williams says a reverse mortgage has its good and bad points. Among the pluses:

• No repayment as long as the borrower stays in the home and the homeowner can't be forced to vacate so it can be sold to repay the loan

• Income payments are received tax-free.

• Payments are not counted as earnings for Social Security or Medicaid purposes.

• Payment can continues for the lifetime of the homeowner or spouse.
  
  Among the negatives:

• Since the home is sold, a reverse mortgage means leaving less to survivors.

• Depending on the state of residence, a reverse mortgage may affect welfare benefits, such as food stamps.

• It can be an expensive way to generate cash income, especially during periods of high interest rates. In a reverse mortgage, a borrower is using the home's equity and for this privilege paying out a substantial amount of interest and loan charges.

Not a good deal for some seniors
Reverse mortgages are ill advised for older persons who have investments or savings income and have no special desire to remain in the home.
"Homeownership is the greatest source of wealth available to most elderly persons," Williams said. Statistics show that in 1992, 75 percent of Americans older than 65 owned their own homes, and almost 80 percent of those homes were mortgage free.
While a reverse mortgage may be beneficial in many circumstances -- where the person is unmarried, very old or with low income -- "income realized from reverse mortgages may not always be significant," she said, adding it pays to do a thorough investigation before making a decision.