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Reverse mortgages can be useful for careful retirees
 

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Reverse 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.

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Reverse mortgages 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 mortgages.

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 says.

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.

Potential borrowers 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.

For 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 Web site.

"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, Fla.-based American 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
About 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 sum
  • 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 credit

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 next year.

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 accrues interest.

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 department.

 
-- Posted: Feb. 27, 2003
   

 

 
 

 

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