By Martin Dekom

eCare Diary is pleased to present a series on financing long term care during this National Caregivers Month. We invite experts on different topics to explain the basics and provide helpful information. The first topic is reverse mortgage which has received much attention during the economic downturn.

Martin Dekom is a discount reverse mortgage specialist with Jacob Dean Mortgage and is based in Manhasset, NY. For years, he has been deeply involved in personal financial planning, what he calls "kitchen table economics." He has been widely quoted by local media on reverse mortgages and has spoken extensively on the topic. He is also very involved in the community, having served as president and chairman of the Long Island Junior Chamber and is active on elder issues. Martin’s contact information: martin.dekom@gmail.com, 516 850-2717, 34 High St, Manhasset, NY 11030.

While the media has everyone concerned about Swine Flu, there is another epidemic that is quietly, but rapidly, spreading. Like many diseases, it preys worst upon the elderly. It is called “Financial Anxiety.” Obviously this is a strange time for many of the senior set, as all manner of wealth- from the stock market to home real estate- has been decimated. However, a backwater of mortgage finance has caught a lot of attention as a solution: the reverse mortgage. This program is sponsored by the federal government through the Home Equity Conversion Mortgage (HECM) program, administered by FHA.

Many people mistakenly believe that a reverse mortgage is a “pre-sell” of one’s home, where they give the lender title to the property in exchange for cash today. This could not be farther from the truth. It is a mortgage like any other, with the big difference being that there is no monthly payment. Instead of paying the interest monthly, it is paid all at once after the last borrower no longer lives in the house. More often than not, the mortgage comes due because the borrower died. Since it is commonly linked to mortality, at least one borrower must be older than 61. A parent and younger child can get a reverse, if they are willing to alter the title. Also most properties held in trust are eligible, again, as long as it can be attached to that senior citizen.

The proceeds of a reverse are paid out in one of three ways: lump sum, line of credit, or monthly payment for as long as you live in the home. Previously the line of credit was the most popular option, but with the introduction of fixed rate reverse mortgages, the lump sum has been coming on strong. Generally speaking, one gets a larger upfront payment from the fixed rate program than those hinging on Adjustable Rates.

There must also be some equity in the property. Reverse mortgages are low loan-to-value loans, consequently, borrowers who have a sizeable mortgage or whose home value has dropped precipitously may find they do not qualify. All hope is not lost: some lenders will negotiate on pay-off or other terms.

But if you own your home outright, how much can you get? For most clients, their “walking away money” will be between 40 and 80% of the value of the home, based on their age. It can be less, depending on your lender and the closing costs. Which brings us to the sound of the other shoe falling, the closing costs: a borrower can expect them to be in the area of 3-4% of the home value. However, these costs are built into the balance of the loan, so the longer the loan is in place, the less cost per year. As a Rule of Thumb, a reverse mortgage may be a good idea for someone who intends to stay in place for longer than 4 years. Less than that, and the annual cost may not be worth the benefit.

The flipside is: Don't be afraid to ask for discounts, as there is a wide range in lender's fees and rates. Like ordinary Mortgages, the biggest boost to one’s upfront financial benefit is by getting the best possible rate. Do not be satisfied when a salesman from a company advertising on TV says, “Everyone’s costs are pretty much the same.” The net impact can differ by tens of thousands. Second, after rate, see if your lender can chip down the closing costs. Ask the following questions:

• Are they willing to negotiate origination?
• Can they do something about the costs from other service providers?
• Are you getting the right rate for title insurance?

As with any major purchase, the consumer’s best advantage is the ability to compare. Lastly, there is a monthly service fee attached to a reverse mortgage, from $25 to $35. There is no earthly reason to pay the high end- you derive no benefit and it reduces your available money.

Taking out a reverse mortgage (or any mortgage) for a short term fix is often a bad idea. Paying too much when you can get it for less is another obvious pitfall. But less obvious is too much concern for “after” and not enough for “now.” Many senior citizens feel that using their home equity to pay for their needs is somehow cheating their children. However, not being able to pay their bills will shift their financial burden to their kids anyway. Second, and more importantly, it is a rare case where the offspring want their parents to eke out a meager subsistence living when a source of wealth is right at hand.

I have often outlined legacy strategies for clients, and when they ask which one I recommend, I answer “None of the above.” In this transaction, the primary purpose is to ensure an adequate lifestyle for the elderly client. If there’s anything left over, that’s a bonus. The goal remains to not just combat the disease of financial anxiety, but eliminate it. That's what "retirement" is supposed to mean!