mortgages are useful, but take care
When you retire and live in your own
home, you might find that Social Security, a pension and savings don't provide
enough income. A reverse mortgage can be a valuable tool to meet expenses.
With a reverse mortgage, a homeowner age 62 or older borrows from the home's equity.
Principal and interest aren't due until the homeowner dies or moves out. These
loans have become increasingly popular in recent years as the long bear market
has squeezed retirees' finances.
are complex. They can be expensive to borrowers who use them for only a short
time. Experts recommend that homeowners evaluate all options before getting reverse
Riding out your home's equity
Anyone considering getting a reverse mortgage should first read AARP's
excellent guide. It is comprehensive and easy to understand. There also is
a useful guide at the site of the National
Center for Home Equity Conversion.
Ken Scholen, author
of both of those guides to reverse mortgages, advises potential borrowers to consider
all options first.
"Even though it's the last thing
on your mind, I always encourage people to seriously consider selling and moving,"
He recommends that people at least find
out roughly how much they would get for their home and how much it would cost
to move and buy or rent another place.
should make sure they are getting all government benefits they are eligible for,
and "talk this thing through with their family if they have the kind of family
they can discuss these things with," Scholen says.
those who handle them with care, the loans provide a vital financial cushion.
"We were looking toward primarily the purchase of security
later on in life," says Norm, 77, of Ormond Beach, Fla. He requests that
his last name not be used because his wife dislikes notoriety. "We wanted
long-term care, and to be able to afford that, why not use some of the equity
in the house to buy it?"
Norm and his wife, 75,
have a line of credit tied to their reverse mortgage. They make a phone call and
the loan is transferred to a bank account. In the two years that they have had
the account, they have used the money for more than insurance payments. They have
used it to pay for home improvements, including a new roof and replacing the air
conditioning. "All this has been covered, with no strain at all," says
Norm, a former director of sitcoms. He adds mischievously, as his wife cracks
up at his comic timing: "That and the line of dancing girls that we have
come in every night."
It is these sorts of expenses --
minus the dancing girls -- that reverse mortgages often are intended to address.
The money can be used for any purpose, says Glenn Petherick, director of communications
for the National
Reverse Mortgage Lenders Association, which keeps a list of lenders on its
"One of the most popular (uses) is those
who need a little extra income, maybe for living expenses or home repairs or improvements,"
Petherick says. People have used the money to make their homes more accessible
by adding ramps or turning downstairs dens into bedrooms. Petherick knows of at
least one person who spent the money on a recreational vehicle.
Reverse mortgages took off in 2002, when the number of loans jumped by 74 percent
over the previous year, to 14,181, Petherick says. The rapid growth appears to
be continuing this year.
W.L. Pulsipher, president of Ocala,
Reverse Mortgage, which underwrote the loan to Norm and his wife, evangelizes
for reverse mortgages.
"It's a godsend for seniors, and
I say that as a nonreligious person," he says. "Where else can you so
easily qualify and get free money? And when I say free money, 90 percent of these
people are never going to pay this back. They're getting money to use that they
have built up in their lifetime, like an IRA or a 401(k)."
Types of payment
95 percent of reverse mortgages are insured by the Federal Housing Administration.
Under the FHA's Home Equity Conversion Mortgage program, borrowers can get their
money in one or a combination of ways:
- as a lump
- as a specified amount every month for a fixed period
such as 10 years
- as a specified amount every month until
they die or permanently move out of the house
- as a line of
The amount available to borrow
depends on the borrower's age (with couples, it depends on the youngest borrower's
age), the home's value, the interest rate and how the money is taken out. The
older the borrower and the lower the interest rate, the more cash the borrower
can get. Maximum loan limits vary by county.
An HECM line of credit has a useful feature: The
credit line grows at the same pace as the interest rate. So if you have a $10,000
line of credit at 6 percent interest this year, the credit line will grow to $10,600
Closing costs can be rather steep, making these
loans expensive for people who borrow from them for only a couple of years. The
costs include an origination fee of 2 percent of the home's value, plus a mortgage
insurance premium of 2 percent of the home's value. For a $100,000 home, that's
$4,000 in closing costs right there, which can be rolled into the loan amount.
The borrower sometimes pays an application fee and usually has to pay for an appraisal.
All HECM mortgages have adjustable interest rates based on the yields on 1-year
Treasury notes. Borrowers can choose to get a rate that adjusts annually or monthly.
Rates are set by a formula, so they don't vary by lender.
Till death you don't pay
Perhaps the most attractive feature of reverse mortgages is what Pulsipher
alluded to: There are no monthly loan payments, and the loan doesn't have to be
repaid until the last borrower dies or moves out of the house.
Death is the most common way for the loan to come due, Pulsipher says. Usually,
the loan is repaid from the proceeds of the sale of the house. The heirs have
up to a year to repay the loan after the borrower's death. Meanwhile, the loan
If the loan balance exceeds the home's fair
market value, the FHA insurance fund reimburses the lender the difference. In
other words, if your parents die and the loan balance is $100,000, but you can
get only $90,000 for the house despite your best effort, the FHA insurance fund
gives the lender $10,000.
Borrowers under the HECM program
are required to discuss the loan with a counselor approved by the federal housing