How do reverse mortgages work for co-op shareholders?
A reverse mortgage, newly available for co-op shareholders, can be a good option for seniors on a fixed income.
I read that reverse mortgages are going to be available for co-op shareholders. Who do they work best for? What are the pros and cons?
Taking out a reverse mortgage could be helpful to senior citizens on a fixed income, but it's important to be aware of some potential downsides, our experts say.
Reverse mortgages will become available to co-op shareholders for the first time—specifically, to shareholders who are 62 or older and use their co-op apartment as their primary residence. (They were recently approved by the New York State legislature and take effect in May.)
Those who qualify should make sure they understand the potential pros and cons of using this product. A reverse mortgage is a type of home loan in which the bank pays the owner a monthly stipend based on the home's value and the owner continues to live in their apartment.
This can be very helpful to owners on a fixed income, but they should be aware that taking out a reverse mortgage adds onto their existing mortgage and decreases the equity they own in their home.
"Reverse mortgages are unique," says Andreas E. Christou, an attorney with Woods Lonergan. "They typically involve receiving an up-front payment, a stream of payments, and/or satisfaction of your debts, such as an existing mortgage. And in exchange, the bank will take the property, or in the case of a co-op, the shares and lease, upon the death of the shareholder, rather than requiring repayment."
Co-op shareholders considering a reverse mortgage may want to discuss with their relatives the fact that this means they will likely be unable to inherit the apartment after the shareholder's passing, because it will then become the property of the bank. Shareholders should also consult an attorney, who can advise them on all the advantages and disadvantages of this decision.
"The downside to reverse mortgages, particularly with a cooperative, is that a property may increase in value, sometimes substantially, beyond the amount conferred by the reverse mortgage. The reverse mortgage lender would be entitled to the property as well as any equity or increase in value, unless the reverse mortgage loan amount can be paid off in full, either by sale or otherwise," Christou says.
That means if upon the owner’s death the apartment is worth more than the mortgage, the heirs can sell the unit and pay off the loan, keeping the profits, says Klara Madlin, founder of Klara Madlin Real Estate.
"It is very stressful for older people to have to move from homes they have lived in for many years, Madlin says, adding that this would have been a "life changer" for many elderly co-op shareholders if it had been available in the past.
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