Reverse Mortgage Loan Blog

More homeowners over 62 are tapping their home equity with a reverse mortgage

When Pat Schrantz’s husband died five years ago, she wasn’t sure how she could stay in her Cottage Grove home.

“I wanted to, and my family wanted me to … but my financial situation was such that I was really on the edge of being able to stay and meet my monthly expenses,” said 69-year old Schrantz.

Though she didn’t have much cash flow, she had a valuable asset: a nice home, completely paid for. Her daughter suggested that she look into a reverse mortgage. Schrantz and her son-in-law met with a financial counselor to learn more.

“He and I were really impressed,” she said. “We thought, ‘Hey, this is a no-brainer.’”

A reverse mortgage is a loan against a home’s equity that provides cash to a borrower in the form of monthly payments or a line of credit. The loan, available only to people 62 and older, requires no repayment until the last borrower (in the case of a married couple) sells or moves out. At that time, the borrower or the borrower’s heirs must repay the cash received plus any fees and interest charged over the life of the loan. The repayment is usually made through the sale of the house.

Though reverse mortgages have been around since the late 1980s, their popularity has soared in recent years. In 2006, about 85,000 reverse mortgages were issued, up from about 48,000 the year before, according to the U.S. Department of Housing and Urban Development. In Minnesota, the numbers are up 55 percent for the same period, to 1,137 last year.

While experts caution that the loans don’t work for everyone, and fees can be high, reverse mortgages give many seniors financial flexibility they wouldn’t otherwise have.

Schrantz, for example, was able to tap about 25 percent of the value of her home in her loan. So far, she’s used the money to replace a furnace, install a sprinkler system and do some landscaping. And when the time comes to buy a new car, she knows she’ll have the money for that, too.

“That’s the sort of thing I can do without getting stressed about it or wondering where [the money] is going to come from,” she said.

Minnesota’s high homeownership rates make the state fertile ground for reverse mortgages, especially since people tend to remain in their homes longer, said Dan Williams, senior program manager at LSS Financial Counseling, a division of St. Paul-based Lutheran Social Service that provides counseling to seniors considering reverse mortgages.

Williams and other industry experts say they wouldn’t be surprised to see the Minnesota number double in 2007.

“They are going to continue to increase in popularity as the baby boomers come on board,” said Larry Skalicky, reverse program manager for Wells Fargo, one Minnesota lender offering the loans.

Financial planners, bankers and mortgage brokers are all starting to find out about the product and pass that info along to customers, said Dan Mitchell, president of Credo Mortgage in Inver Grove Heights.

“It’s been the best-kept secret in the mortgage industry,” he said.

Another factor in reverse mortgages’ growth has been the steep home appreciation of recent years. That’s been a double-edged sword, said Bonnie Clark, of Reverse Mortgage Counselors Inc. in St. Paul: While seniors have more equity in their homes, those higher home values translated into higher property taxes that many seniors found they didn’t have the money to pay.

And many of today’s seniors have fallen into debt as their fixed incomes collide with higher heating costs and grocery bills.

“A lot of people put credit-card debt, their car and other things into a home-equity loan,” said Clark. “They are on a fixed income and when they try to pay off their home equity loan, they don’t have the money.”

The Federal Housing Administration, a division of HUD, introduced the first reverse mortgage, called the Home Equity Conversion Mortgage (HECM). HECMs still account for about 96 percent of all reverse mortgages in the U.S., said Anita Olson, a housing program specialist with HUD. But that proportion may drop as new versions pop up from banks and other financial institutions.

How much money someone can get from a reverse mortgage depends on a number of factors, including the person’s age, his or her spouse’s age and the amount of equity in the home. Generally, the older you are, the more money you can get because you’re likely to remain in your home for a shorter period of time.

“If you’re 62 and own a $200,000 home, you might get $90,000 in proceeds from a reverse mortgage. But if you’re 82, you might get $150,000,” Williams said.

Besides the cash, there are other pluses, experts say.

Reverse mortgages are non-recourse loans, meaning if borrowers or their heirs owe more than the home is worth - because fees and interest rates run high - they are responsible for no more than the amount the home sells for.

“If there is more money owed, the government will make up the difference,” Mitchell of Credo Mortgage said.

In the Twin Cities metro area, the FHA will insure up to $276,683 on a HECM.

And, proceeds from a reverse mortgage aren’t taxable and generally don’t affect any kind of public benefits because it is considered a loan and not income, Williams said.

But experts warn that reverse mortgages aren’t for everyone.

Homeowners without much equity in their home, or who expect to stay in their home for only a few years aren’t good candidates, since the reverse mortgage and fees would reduce the amount of equity they’d receive when they sell. Neither are people who might have to leave their homes for more than a year because of health or other reasons, since under the HECM program, the loan becomes due after a year away from the home.

Fees can be significant. Typically, they include an origination fee of 2 percent (roughly double that of a conventional mortgage) or $2,000, whichever is higher; an initial mortgage insurance premium of 2 percent; an appraisal fee and other closing costs commonly charged in any mortgage. On a $150,000 reverse mortgage, that could add up to more than $6,000 in closing costs right off the bat. Those costs can generally be rolled into the total cost of the loan, but they cut into the total benefit.

Something else to be aware of: interest is charged every month on the outstanding balance of your loan, so the amount you owe on a reverse mortgage grows over time.

Although fixed-rate reverse mortgages are expected to hit the market soon, most of the reverse mortgages today are adjustable-rate mortgages, which means the rates can go up and cost seniors even more money in the end.

For all these reasons, seniors interested in a reverse mortgage are required by law to meet with a reverse mortgage counselor - someone like Williams or Clark - who can explain the pros and cons of a reverse mortgage. Today those counseling services are free and subsidized by the government, though that may not be the case in a few months, as the pool of money will soon be exhausted.

“It’s not a cheap loan,” Clark said. “So you want to make sure you understand everything and that it will work for you.”

Nicole Garrison-Sprenger can be reached at ngarrisonsprenger@pioneerpress.com or 651-228-5580.

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