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Reverse mortgages -- Page 2

Interest rates
Reverse mortgage interest rates aren't fixed. Instead, says Gerald C. Wagner, president of San Francisco-based Ibis Capital LLC, they are adjusted monthly or annually throughout the life of the mortgage and are computed by adding 1.5 percent to the current one-year Constant Maturity Treasury rate. Rate changes do not affect the amounts paid to the homeowner, only the amount that will be owed when the mortgage is ended.

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"Changes in interest rates cause the loan balance to grow faster or slower, but do not affect the number of loan advances a borrower can receive," explains Jeff Taylor, vice president for senior products with Wells Fargo Home Mortgage.

Despite rising rates, however, consumer demand for reverse mortgages is exploding, and experts say they don't see it diminishing any time soon. That's because reverse mortgages, unlike forward mortgages, are need-driven -- they pay for health care or to keep up with property taxes, for example -- rather than being driven by interest rates. Instead of taking money out of a borrower's pocket, they do the opposite -- putting needed cash into a senior borrower's pocket.

Taylor's own mother recently took out a reverse mortgage. She used the money to pay off an existing traditional mortgage that was costing her $380 a month. She took the balance as a line of credit.

"Now she's free from making monthly payments and can draw on the line of credit whenever she wants for whatever she wants," says Taylor, who adds that half the reverse mortgages written by Wells Fargo involve a lump-sum payment combined with a line of credit or a fixed monthly payment.

"With baby boomers on the verge of retirement, I expect the number to explode in the years ahead," says Peter Bell, president of the NRMLA.

It's been an uphill battle so far, thanks in part to the long-held belief that retirees should either live mortgage-free or drastically downsize. But for many Americans, their home is their primary source of wealth. "Why not tap into it?" asks Bell. "Why live the golden years under financial constraints when you don't have to?"

Widespread misconception
Reverse mortgage lenders have also had to dispel the popular notion that borrowers have to sign over ownership of their home to the lender or that the equity in the home is lost to any heirs if the owner dies -- no matter how much has been drawn. Neither is true. The lender holds a first mortgage security interest in the home -- as in a traditional mortgage -- while the senior homeowner retains full title to the property.

Bell says that what makes reverse mortgages, which have been offered since the late 1960s, so appealing is the fact that senior retirees can continue to live in their homes while turning their equity into cash. Unlike a traditional or forward mortgage or home equity loan, there are no payments -- monthly or otherwise -- as long as the borrower remains in the home, and the loan doesn't have to be repaid until the last borrower dies or moves out of the house.

When that happens, the estate, the heirs or the homeowners themselves, if they are still living, have a full year to sell the property and pay off the reverse-mortgage holder.

And thanks to insurance mandated by the federal government for certain reverse mortgages, borrowers or their heirs may never owe more than the house is worth, regardless of how much interest has accumulated over the years.

But if the reverse mortgage sounds like a godsend, be aware that it has drawbacks, too.

For one thing, they are expensive. Closing costs include all of the charges that come with a traditional mortgage -- application fees as well as appraisal, title insurance and document stamps charges -- plus 2 percent of the home's value to cover the FHA-mandated cost of insurance to insure that the amount owed will never exceed the value of the home.

Origination fees can add another 2 percent or more of the home's value to the closing costs, so they are not a good idea for those who do not expect to remain in their homes very long -- for at least three years.

They're also not for those who want a few thousand dollars to replace a heater or resod a lawn, or for those who are hellbent on leaving every last penny to their children.

"The closing costs are too high," explains David Klein, an elder law attorney in Suffern, N.Y. But for those who do plan to stay three years or more, reverse mortgages truly are useful and effective, says Klein.

He recently helped an equity-rich client -- a 66-year-old widow on a fixed income -- obtain a reverse mortgage. "It paid off her high credit card debt and her mortgage and gave her income, too," he says.

But being pressed for cash isn't the only reason to take out a reverse mortgage. For example, Aleck and Sheila Townsley took one out on their home that overlooks San Francisco Bay even though their retirement had been comfortable enough -- he's a retired attorney and she's a retired school teacher. They chose a line of credit in order to be able to enjoy the "extras."

"We have no children," Mr. Townsley explains. "So I want to spend my last dime with my last breath."

For more information, and to calculate how much you may be able to borrow, visit AARP's reverse mortgage page or NRMLA's ReverseMortgage.org.

Peter Davidson is a freelance writer based in Florida.

-- Posted: May 23, 2005




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