Tapping the equity of older homeowners with reverse mortgages. (Cover Story)

The numbers certainly are impressive. Americans age 65 years and older now total 32 million. Of these, three-quarters own their own homes, and nearly two-thirds of them own their homes free of any mortgage. Total home equity of older Americans approaches $700 billion, representing a tremendous financial resource. But recent surveys show 86% of older homeowners want to remain in their homes for life. As a result, more Americans are asking their CPAs the same question: How can we tap some of this equity without leaving the home we love? This article considers one available option-the reverse mortgage.

KEY FEATURES

With reverse mortgages, owners borrow against the equity in their residences and defer repayment until some time in the future. Beyond this simple description, reverse mortgages vary widely in their key features depending on state law and local practice. Loan duration, borrower eligibility, repayment schedule, interest rate, size of loan and disclosure requirements all are important variables. (See the sidebar on page 39 for a description of some of them.)

Some uniformity may result, however, from the recent Federal Housing Administration (FHA) announcement of a tenfold expansion of its reverse mortgage program. This program's features are of particular interest to practitioners because of the program's national scope.

In general terms, FHA-insured reverse mortgages are available to people who are at least 62 years old and live in single-family dwellings that comply with local building codes. The amount that can be borrowed depends on the home's value, the borrower's age, prevailing interest rates and local housing cost averages. Many rural areas, for example, have a maximum loan amount of $67,500, while in other areas the FHA will lend up to $124,875 (1992 limits).

FHA mortgages, moreover, are of the life tenure type; that is, borrowers need not repay the loan until they die or move out of their mortgaged residences (perhaps to nursing homes). This feature contrasts with the more conventional fixed-term arrangement, under which monthly payments are sent to homeowners for a stipulated period of time and the total of those payments, plus interest, are due at the end of the period.

The …