Printer Friendly

Email to A Friend

Friday February 10, 2006

Reverse loans let homeowners cash in on their equity

by emmet pierce
copley news service

After her daughter died, leaving her two grandchildren to provide for, Annie Robinson increased her modest income with a reverse mortgage loan that tapped into the equity of her small, inner-city home two miles east of downtown San Diego.

“I had to take care of the children, had to feed them, send them to school,” said Robinson, who was 69 and divorced at the time of her daughter’s death. “I had just retired. My little check wasn’t better than $500 a month. I said, ‘Well, my house is paid for so I will use it.’”

A 20-minute drive away, Curly Collier occupies one of many well-kept homes on a suburban street overlooking a lake. The 84-year-old widower decided to take out a reverse mortgage to eliminate his mortgage payments and free up income for travel.

Aware that a reverse loan would reduce the value of his estate, Collier first discussed it with his children, who range in age from 55 to 61. “They said, ‘Go for it, Dad,’” he recalled.

Growing in popularity among homeowners nationwide, reverse mortgages are designed for people age 62 and older. Frequently described as the mirror image of conventional loans, they can enable homeowners to sustain their quality of life in retirement, secure in the knowledge that they can remain in their homes. Rather than making payments, reverse borrowers receive them, tapping into home equity.

To determine the amount of the loan, the lender considers the homeowner’s life expectancy and the value of the property. A senior can receive the money as a lump sum, monthly installments, a line of credit or a combination.

In general, the older the borrower, the more money he or she will get. If homeowners choose to receive monthly installments, the payments are guaranteed for life, no matter how long the borrower may live. But lenders are counting on borrowers to die within a predicted age range to guarantee that the loans are profitable.

The payments aren’t taxed and typically don’t affect Social Security or Medicare benefits. The borrower remains the home’s legal owner and is responsible for property taxes and insurance. When the borrower dies or permanently moves away, the loan and all interest charges must be paid off.

Under regulations governing the loans, lenders agree they will never require repayment in excess of the home’s value, which is the sole asset that can be used to pay off the debt.

“This is a non-recourse loan,” said Dean Jones of SCME Mortgage Bankers in San Diego. “We can’t go against the borrower’s personal assets. We can’t go after their children’s assets.”

Still, high up-front costs, such as mortgage insurance fees, origination fees, appraisal fees and title insurance usually make reverse loans a poor choice for people who plan to remain in their homes for only a few years.

Making major financial decisions late in life can be difficult, so bringing a relative or trusted adviser to meetings with lenders can help. “It is sophisticated, complicated and potentially risky,” said Steven Hornburg, a longtime housing consultant based in Arlington, Va. “You’ve got to know what you’re doing.”

Lenders originated nearly 38,000 such loans during fiscal 2004, a 109 percent increase over the previous year, said Darryl Hicks, associate director of the reverse lenders association.

Before joining the pack, it’s a good idea to find out how beneficial a reverse loan could be. AARP helps consumers estimate what sum they might receive with an online calculator, www.aarp.org/money/revmort.

However, housing counselor Ellen Brown of the nonprofit Neighborhood House Association in San Diego says aggressive marketing is fueling

a rush to tap

into home equity among the elderly.

Cindy Davis, head deputy city attorney for the Consumer and Environmental Protection Unit in the San Diego City Attorney’s Office, worries that some seniors may be taken advantage of.

“Seniors are looking for steady streams of income,” she said. “A lot of them have equity in their homes. You get something in the mail. It seems so appealing. We want to make sure seniors are getting the full story. The money is going to come out of the house at some point.”

A generation ago, most people strived to pay off their mortgage before they reached retirement. Lenders say convincing those who lived through the Great Depression to take on new debt during their golden years can be a tough sell.

For some consumers, “it sounds too good to be true,” said Jones. “They are afraid of losing their home. It is a debt that has to be repaid.”

Sarah Glendon Lyons, co-author of the “Reverse Mortgages for Dummies” reference guide, said borrowers should keep repayment in mind.

Some borrowers mistakenly think of a reverse mortgage as free money, she said. In the end, all of the fees, principal and interest will be paid off by the borrower’s estate when the home is sold. And although most reverse loans are federally insured, they are not subsidized by the government.

The major benefit “is that you, as the borrower, are able to get ready cash when you need it — which is now, not when you sell your home,” Lyons said. “You don’t have any repayment until you are no longer living in the home. Unlike a home-equity loan, you are not making monthly payments on what you’ve borrowed.”

Did you find this article interesting? Subscribe to our FREE newsletter and you'll be notified each week when "J." goes online. We'll tell you about the most important stories of the week and give you a link to each one.

This page contains a BETA version of Amazon contextual links. They are marked by the dashed underline.  Your purchases support our site. At times they point to items which are not related to the actual link. Please alert us by email if you discover objectionable links.