Reverse Mortgage Loan Blog

Your house is paid off. Should it now pay you? 

Julian and Jo Bell love their little yellow house in Union County, a home with 50 years’ worth of memories and comfort. So when money began to get a bit tight and the house needed repairs, the commercial Julian heard on TV sounded like the answer.

“I heard about reverse mortgages on TV and I thought, `Boy, that’s fine.’ ” said Julian Bell, 86. “The house is paid for. … The children didn’t want the house — they all had their own homes.”

The Bells got a reverse mortgage with Financial Freedom Senior Funding, a subsidiary of IndyMac Bank in Irvine, Calif. The loan lets them stay in the house, which will become the bank’s after they die or sell it.

After up-front fees and other loan costs, they paid off a $15,000 home equity loan and wound up with $48,000 to live on and keep up their house.

“It’s nice to have a little (savings) you can count on,” said Julian, who keeps busy knitting brightly colored afghans that he gives away or sells. “We don’t expect to move. We’re perfectly happy where we are.”

The Bells are among a fast-growing number of older homeowners who are tapping their homes for cash to live on as they age — but not in the form of the home equity loans or lines of credit their younger homeowning neighbors get. Competition is heating up in the reverse mortgage market. Several lenders offer reverse mortgages in the Carolinas. The newest is Bank of America, which began developing reverse mortgage products nationwide this year.

Reverse mortgages, loans that let homeowners turn part of their equity in the house into cash in hand without having to sell their houses, are booming nationwide and in the Carolinas.

The growth of reverse mortgages cheers proponents, who say the loans are a great way for seniors to better their lifestyle without selling their houses. It’s especially good, they say, for seniors who are house-rich and cash-poor.

And it concerns others. The rough economy, poor savings habits and a growth in the number of people who enter their 60s and 70s with hefty mortgage payments all are contributing to the growth in the costly loans, these industry observers say. They fear seniors take out the expensive loans when it might be better to sell their homes outright, reaping more of the equity, and move someplace cheaper. Or that they’ll take out a reverse mortgage then have to leave in a few years to live in a nursing home, having spent thousands for a loan they didn’t fully use.

Changing lives

For Donald and Gail Gosch of Forest City, a reverse mortgage solved a cash crunch that caught them by surprise. The Gosches moved to North Carolina from Texas to be closer to their daughter and grandchildren. They got a piece of property in the country where Donald can practice on his rifle range and Gail can paint portraits of family and friends.But real estate prices were higher than they expected and they dipped into their IRA to help cover the cost of their modest Rutherford County home, for which they paid cash.

“That cut our income down considerably,” said Donald, 75. “We started feeling the crunch pretty quick.” Donald read a story in a VFW magazine about reverse mortgages and called First Charter Bank in Charlotte.

Last summer, he and Gail took out a reverse mortgage that gave them about 60 percent of the value of their home. Now they live mostly off the $70,000 the mortgage gave them, a few certificates of deposit and Social Security. Donald said the couple is very happy with the loan.

Barbara Shear, the First Charter reverse mortgage specialist who worked with the Gosches, says she gets four or five calls a day from people interested in the loans. Shear is a firm believer in the product, which she says can change people’s lives for the better.

“The first person I ever dealt with in reverse mortgages … called me in tears because she and her husband had been doing OK. (They had) a decent Social Security income and a $700-a-month mortgage on their property and were in their late 70s,” Shear said. “The gentleman died and now she only had one Social Security income instead of two. She had incoming $1,100 a month with a $700 mortgage.” The reverse mortgage paid off the home loan and gave the woman money to live on, Shear recalled.

Worrisome trend?

But this is the kind of situation that troubles Christena Schafale, who counsels people considering a reverse mortgage.

In the past, “people always assumed they’d have their mortgage all paid off when they got into their 70s,” said Schafale, director of information services at Resources for Seniors, a Raleigh nonprofit agency. Now, many have “consolidated credit card debts with home equity loans, then they get into trouble with that.”

Further, said Schafale, people often are in denial about their future health — and their ability to stay in their house until they die. Many will need the value in their homes to help pay for nursing care, she said. It’s estimated the average homeowner stays in his or her house seven to eight years after getting a reverse mortgage. And while Medicaid can help seniors without assets to pay for a nursing home, Schafale said many people don’t go straight from their house to a nursing facility. Instead, they spend some time in an intermediate living arrangement — a smaller apartment with no stairs, for example, or a retirement center. Using up the value of their houses with a reverse mortgage may not leave them with enough money to afford that new home, she said.

When people do go to nursing care, they must spend their own assets before Medicaid kicks in, and having home equity to spend to upgrade their care — get a private room, a fancier facility — can help. “So it’s definitely worth it to have some of your own money left,” she said, “even if you eventually end up having to apply for Medicaid.”

Bank of America, which projects the reverse mortgage industry will grow 30 percent a year for the next five years, quizzes customers on why they get the loans. The top reason is to pay off an existing mortgage or debt, said Colin McCormick, Bank of America reverse mortgage product executive. (The next three most-common reasons, in order, are to supplement monthly income, to pay for home improvement and to pay medical expenses.)

Nationally syndicated radio show host Dave Ramsey preaches a get-out-of-debt message to listeners, so it’s not surprising he finds the boom in reverse mortgages worrisome.

“If money is that tight,” Ramsey said via e-mail, “then it is possible you can’t afford to stay in the house. I know it’s hard to leave the home you’ve lived in for 20 years or even 50 years, but it’s a better option to sell the house and move somewhere cheaper.”

`A godsend’

Dorothy and Joe Yoshimoto will say that it’s just not that simple. The Phoenix couple bought their small red brick home in the 1960s, raised their only son there, held his wedding there, and, when he died unexpectedly, held his memorial service there.”There’s just so many memories in this house,” said Dorothy, 73, who raised her grandson in the house as well. When a stroke forced Joe to retire, Dorothy had to leave work to care for him. Social Security kept them afloat — the house was paid for — but there was nothing for repairs. A home equity loan they took out to keep up the house began to crush them.

“I really was getting panicked,” Dorothy said. “The payment was getting so high. It’s a terrible feeling.”

She turned to a Bank of America reverse mortgage, one of the Charlotte bank’s new “platinum” proprietary loans that allows a higher loan-to-home value than traditional loans. “It was absolutely a godsend,” Dorothy said. “It gave us enough (cash) that we don’t have to worry. We have to be very frugal, but we don’t have to worry.”

Pros and cons of reverse mortgages

Pros

• Without a reverse mortgage, the only way to get money out of the home is to sell it or take out a regular loan against it and make payments. For seniors who don’t want to move but need extra cash to live on, the loans can help.

• Older borrowers can cash out more equity than younger borrowers, making the loans attractive to house-rich, cash-poor people who are in their 70s or older.

• A reverse mortgage can provide the cash needed for long-term care in the home or retrofitting the home to let the borrower avoid having to move to a nursing home.

Cons

• Reverse mortgages are very expensive loans. If you take one out and don’t stay in your house very long, you will have paid hefty fees without being able to use much of the income stream from the house.

• You can’t leave the house to your heirs.

• You must allow enough in your calculations to pay the taxes, insurance and upkeep on the home or the lender can foreclose.

• If you qualify for a low-cost home equity loan and can handle the monthly payments, it’s a cheaper way to make home repairs than to take out a reverse mortgage.

• You will get more money out of your house if you sell it outright while you are living.

• The products are much more complicated than regular loans. Borrowers should use a reputable lender and make sure they understand every detail.

Where to get more information

AARP: Call: AARP at 800-209-8085 to get a copy of its publications on reverse mortgages or talk to a counselor. Online: Go to aarp.org and type “reverse mortgage” in the search field to get information. The Federal Housing Administration

To read about the loans online, go to: www.fha.gov/reverse/index.cfm

How reverse mortgages work

Most reverse mortgages are insured by the Federal Housing Administration. Borrowers must be 62 or older and are required to meet with a HUD-approved counselor to consider alternatives to the loan.

The amount homeowners can borrow depends on the interest rate, the home’s value and their age. On average, borrowers come away with between 45 and 65 percent of the equity in their homes, according to Bank of America. The remainder is used to pay the future interest and the closing costs.

Reverse mortgage closing costs — which are higher than those on a regular mortgage — include a mortgage insurance premium, which is 2 percent of the home’s appraised value or the FHA lending limit for that county, whichever is lower. Borrowers also pay a 2 percent origination fee to the lender. Then there are other costs, such as the appraisal, title fees and other charges, which can total anywhere from $1,000 to $1,700 or so, depending on the lender. Most borrowers roll these closing costs into the loan. For instance, a 70-year-old homeowner with a paid-off house worth $200,000 in south Charlotte could get just over $124,000 in a lump sum from a HUD-insured reverse mortgage, according to the AARP’s reverse mortgage calculator (www.rmaarp.com/). Borrowers can choose lump sums, monthly payments, a credit line or a combination.

Customers pay back the loan when they sell the house or die and the house is sold for them. They can never owe more than the value of the home. If it sells for more than the amount of the loan, their heirs get the excess. If it sells for less, FHA makes up the gap to the lender.

The homeowner must maintain the house and pay taxes and insurance, or it’s possible the lender could foreclose.

Borrowers who close on a reverse mortgage have three business days to change their minds.

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