Reverse mortgages -- Page 2
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.
"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
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
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
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.
if the reverse mortgage sounds like a godsend, be aware that it has drawbacks,
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
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.
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."
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.
Davidson is a freelance writer based in Florida.