REVERSE MORTGAGES
A NEW LOAN CONCEPT FOR ELDERLY HOMEOWNERS WHO HAVE
LOTS OF EQUITY BUT LITTLE CASH.
By Dolores Kong
09/24/2000
The Boston Globe
Frank Grandone, 69, a retired textile factory worker,
never seemed able to make much of a dent in the
$28,000 in debt he had from a home equity loan,
credit-card charges, and other bills.
House rich and cash poor, with only Social Security
for income, last month Grandone decided to get a
so-called reverse mortgage, allowing him to tap the
equity in his home to pay off the old debt and get a
credit line, without having to add new monthly
payments.
"I've been here 27 years," says Grandone, who owns a
five-room ranch-style house in Worcester and got the
reverse mortgage through Wells Fargo Home Mortgage,
one of the nation's largest reverse mortgage lenders.
"It was one thing or another. I did the reverse
mortgage instead of selling it and moving out."
Reverse mortgages, a relatively new financing
instrument, allow the elderly to get cash from what is
usually their major, if not only, asset - their home.
Just as the name implies, reverse mortgages work in
the opposite way that a traditional house mortgage
works.
Instead of making a monthly mortgage payment, paying
down the debt and building equity, the homeowner with
a reverse mortgage receives a monthly check, a credit
line, or a lump sum, while the loan balance grows and
the equity shrinks. The reverse mortgage is typically
paid off when the homeowner sells, moves out
permanently, or dies, although some must be paid off
with the sale of the home after a certain number of
years.
Reverse mortgages are typically not offered at fixed
rates, and the interest is adjusted annually or
monthly, with varying caps, depending on the version
chosen. Currently, interest rates for reverse
mortgages range between about 7.4 percent and 10
percent.
"It is a very good way to turn equity in property into
immediate cash," says Frank Pilk, senior product
manager for Fannie Mae, which offers a reverse
mortgage known as Home Keeper. "It's certainly worth
investigating," along with other options, he says.
But reverse mortgages are not for everyone.
They are one of the more expensive ways to borrow
money, because interest compounds, the loan balance
keeps growing, and no payments are made until the end.
The mortgage could use up the equity in the house,
leaving little or nothing for heirs.
Leonard Raymond, director of Homeowner Options for Mas
sa chusetts Elders, or HOME, acknowledges that his
agency prefers to avoid loans to help seniors solve
financial problems. He says reverse mortgages are
extremely expensive transactions.
"They're wonderful innovations," says Raymond, but may
come with high closing costs, monthly compounding of
interest, monthly mortgage insurance that rises with
the loan balance, and servicing fees. Instead, HOME
works with elders to find other alternatives to meet
specific cash needs and uses reverse mortgages as a
last resort.
But thousands of elderly homeowners nationwide, like
Grandone, have found reverse mortgages suit their
needs.
"So far I'm satisfied," says Grandone, who has an
available line of credit of more than $20,000 in
addition to $28,000 he received in a lump sum to pay
off the old debt. "It's there to dig into if I want.
You try not to." As long as he doesn't tap his credit
line, he won't lose more equity in his house.
In May, Andrew Cuomo, secretary of the US Department
of Housing and Urban Development, reported that the
number of HUD-backed reverse mortgages had more than
quadrupled since the early 1990s, to about 40,000
today.
HUD also found that 78 percent of those getting the
agency-backed mortgages were either very satisfied or
satisfied.
It is estimated that more than 12 million homeowners
are 62 or older and, therefore, eligible to
participate in the HUD program. The number is expected
to grow as baby boomers age.
A Cornell University study suggests that more than
620,000 low- income elderly homeowners could lift
their income above the poverty level with a reverse
mortgage.
Since the first reverse mortgages were written under a
HUD demonstration program in the late 1980s, various
types of such loans have been created and various
lenders have gotten into the business. Each product
works differently and comes with its own set of
advantages and disadvantages.
"It's important for consumers to take their time and
not to make the decision too quickly," says Bronwyn
Belling, a reverse mortgage specialist with the
Washington-based American Association of Retired
Persons Foundation.
She suggests that seniors consider other options to
meet their specific needs before considering a reverse
mortgage. For instance, many communities offer
property tax deferral programs for seniors unable to
pay their tax bills, or assistance for medical or
heating bills.
Advocates for the elderly recommend that seniors get
free or low- cost reverse mortgage counseling from a
HUD-approved agency and make use of such resources as
HOME in Boston and the nonprofit National Center for
Home Equity Conversion in St. Paul. They also warn
elderly homeowners to beware of estate planning
services that charge a percentage of a reverse
mortgage, usually amounting to thousands of dollars,
just for providing mortgage information and a lender
referral, both of which should be easily available at
no charge. Some lenders, such as Atlanta-based Unity
Mortgage and Wells Fargo, refuse to do business with
estate planning services that charge such fees.
Here are some other things to consider before taking
out a reverse mortgage:
While the money from a reverse mortgage is tax-free
because it's considered a loan advance and not taxable
income, the cash may still affect your eligibility for
Medicaid and Supplemental Security Income. However, it
does not affect Medicare or Social Security benefits.
Because of a complicated formula that takes into
account average life expectancy, and because the
amount paid back can never be greater than the value
of the house when it's sold or passed to heirs, a
reverse mortgage's cost is lowest for people who live
longer than expected and whose property values
appreciate less than expected.
There are three basic types of reverse mortgages: the
HUD-backed mortgage, the lender-insured mortgage, and
the uninsured mortgage. In most cases, the mortgagor
can receive his or her cash as either one lump sum, a
monthly check, a line of credit, or some combination
of the three. How much you can get depends on your age
(the older you are, the more money you may qualify
for), the value of your house, the interest rate, and
the type of mortgage program you choose.
Reverse mortgages are only available on primary
residences. To qualify, you must be at least 62 years
old and own your home free and clear (or use a lump
sum from the reverse mortgage to pay off existing
debt). The home must also meet standards set out by
each mortgage program. For instance, some programs
won't write a reverse mortgage for condominiums, while
others will.
Many reverse mortgages are open-ended and don't have
to be paid back until the homeowner sells, moves out
permanently, or dies. The money to pay back the loan
comes either from the owner's sale of the house or, if
the owner dies, from the heirs selling it or getting a
traditional mortgage to pay off the reverse mortgage.
The amount paid back on an open-ended reverse mortgage
can't ever be more than what the house is worth. A
monthly mortgage insurance premium that may be added
to the loan balance covers the lender in case the
house is worth less than the loan balance.
There are also so-called term reverse mortgages that
come due after a set period and are typically paid off
with the sale of the house. These are usually less
costly than open-ended mortgages and help to preserve
more of the equity in the house for the owner or his
or her estate. The HOME program offers such mortgages
in Massachusetts.
The leading type of reverse mortgage is the HUD-backed
and Federal Housing Administration-insured product,
called the Home Equity Conversion Mortgage, or HECM.
It's available through such private lenders as Wells
Fargo and Unity Mortgage, which both do business in
Massachusetts. Primarily intended for low- and
moderate- income families, this mortgage is limited by
FHA maximum mortgage amounts, depending on housing
costs in your area. It can't exceed about $209,000.
The FHA insurance guarantees advances will continue if
a lender defaults, but it also makes the loan more
expensive.
If you use the HECM for a credit line and don't draw
on it all at once, the unused portion of the credit
grows over time, allowing you to have more money
later.
An example of a lender-insured mortgage is the Home
Keeper Mortgage by Fannie Mae, a federally chartered,
publicly traded company that provides the nation's
largest source of funds for home mortgages. The Home
Keeper is also available through private lenders.
The Fannie Mae loan has a higher maximum, $252,700,
than the HECM, but that means the final amount owed is
higher. The Home Keeper's credit line is set at a flat
amount and doesn't grow over time as the HECM's does.
There also is the uninsured mortgage, which provides
fixed monthly amounts for a set number of years.
The balance must be paid when it comes due, either by
selling the house or by using other assets to pay off
the loan.
In Massachusetts, the Boston-based HOME program also
has worked with more than 60 community banks on a
specially designed loan that meets an elder's needs
while growing to no more than about 60 percent or 65
percent of the value of the home, over a term of
between two and 15 years. That preserves some equity
so that when the house is sold at the end of the term,
there's enough money to help the senior make the
transition to a new residence.
While all reverse mortgages are expensive, HOME prides
itself on the lower cost of its term reverse
mortgages, which have lower closing costs, no mortgage
insurance, and are not sold to other lenders. The
money can be received as a lump sum or a monthly
payment.
This product may be appropriate for elderly homeowners
facing in- home care situations, says Raymond, because
it preserves equity, which can then be used for
expenses related to the transition to a new
residential situation such as an assisted living or
nursing care facility.
It also may be appropriate for those who are
ineligible for other reverse mortgages. "We had a
woman just recently who got a term reverse mortgage,"
says Raymond. "She was in her 60s and facing
foreclosure. With the size of her debt, she couldn't
qualify for an open-ended reverse mortgage."
By using a term reverse mortgage, she was able to
spend three more years in her house and still walk
away with 35 percent of the equity while avoiding a
foreclosure auction, says Raymond.
As reverse mortgages grow more popular, lenders are
increasing the number of options available to seniors.
Says Belling of the AARP Foundation, "Make sure you
get a lender who tells you all your choices."
SIDEBAR: RESOURCES
- Homeowners Options for Massachusetts Elders, 30
Winter Street, Boston, MA 02108, 617-451-0680 or
800-583- 5337.
- National Center for Home Equity Conversion, 360
North Robert Street, St. Paul, MN 55101, or visit
www.reverse.org.
- Department of Housing and Urban Development's
Housing Counseling Clearinghouse, 888-466-3487. (This
service offers free or low-cost reverse mortgage
counseling and other information.)
- AARP Home Equity Information Center, 601 East
Street NW, Washington, DC 20049.
- Fannie Mae, 3900 Wisconsin Avenue NW, Washington, DC
20016, 800- 732-6643.
- Unity Mortgage, 435 New Karner Road, Suite 200,
Albany, NY 12205, 518-452-5819 or 800-203-4667.
- Wells Fargo Home Mortgage, 18 Route 6A, Sandwich, MA
02563, 508- 888-3450 or 800-677-0886.