Reverse Mortgage Loan Blog

Reverse-mortgage specialist Gary Onks’ elderly client was at the end of his rope. After paying bills, the man had less than $70 a month to live on.

Luckily, he was also living in an untapped source of revenue–his house. Drawing down the equity through a reverse mortgage would allow him to pay off his first mortgage and live there comfortably until he or his heirs decided to sell it.

“The Austin Business Journal has called it the ‘miracle mortgage,’” said Onks, who works for Financial Freedom in Fredericksburg. “To seniors, it is a miracle because they can stay in their homes. There are no payments to make, they have peace of mind about where they’re going to live and they have quality of life.”

Reverse mortgages have been around since the American Association of Retired Persons urged the federal government to authorize them 20 years ago as a way for seniors to stay in their homes as long as possible.

But the once little-known financial product didn’t really catch on until three years ago–and it has been steadily gaining in popularity ever since. Last year alone, 76,351 federally insured home equity conversion mortgages, which make up 95 percent of all reverse mortgages, were approved, compared with 18,097 in 2003.

“HECMs have reached a tipping point, so bigger competitors are entering the field,” said Bronwyn Belling of AARP’s economic security department. “Some have introduced products at a half-percent-lower interest rate. Having more players is helping to drive down costs.”

A reverse mortgage is just what the name implies: a loan that pays out instead of requiring people to pay in. Applicants must be age 62 or older, own their house and use it as their principal residence most of the year.

The amount of cash they can get depends on their age, current interest rates and their home’s value. And the money can be paid in one of four ways:

A single lump sum

Monthly installments

As a line of credit

As a combination of any of those three.

Although there are no monthly mortgage payments, the loan and any interest come due when the borrower sells the house; when the survivor of the borrower moves and no longer uses the home as a primary residence; or when the survivor dies. Any loan balance that exceeds the appraised value of the house at that time does not have to be paid back.

“There is no way you can lose your house as long as you continue paying property taxes and insurance,” said Darryl Hicks, spokesman for the Washington-based National Reverse Mortgage Lenders Association.

There are, of course, up-front costs involved, including an origination fee, closing costs, mortgage insurance premiums and a monthly servicing fee.

“If you’re living in a high-cost area like metro Washington, you may pay $16,000 to $17,000,” Hicks said. “These fees can be deducted out of the loan proceeds except for the appraisal, which can be $300 to $350. Some lenders will pay that appraisal if the seniors can’t.”

For that reason, a reverse mortgage probably isn’t a good option for someone who is planning to stay in their home only a year or two, he said.

Currently, most people who get reverse mortgages are in their 70s and use the money for such things as paying for medical expenses, getting their meals delivered or renovating their house to accommodate special needs.

The counselor they are required to talk to before they can get their loan can help them decide if a reverse mortgage is the best option for this or if there are other resources available, such as Medicare Part D or a community-sponsored home-repair program for seniors.

Currently, there are no certified counselors in the Fredericksburg area, but reverse-mortgage lenders will give clients the number of some they can call.

“In Virginia, there are about 35 agencies, all non-profits, that do it,” said Barry Morris of Sterling Mortgage in Fredericksburg. “We’re trying to the the local Credit Counseling Service to do it. Most of the counselors now are in Fairfax and Virginia Beach.”

Morris said he talks to about seven to 10 people a month about getting a reverse mortgage, and two or three will quickly decide they want one. The rest may wait six months, then call back.

“It’s quite a good product for people who want to draw income out of their homes,” he said. It’s kind of like a 401(k). I think, in the next five years, it will become as popular as a home-equity loan.”

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