Reverse Mortgage Loan Blog

Fixed-income seniors tap their homes for cash — but it’s not for all

When Doris Heil bought her house in west Wichita about 20 years ago, she did so with the help of a personal loan from a friend. Her friend recently moved into a nursing home, and Heil wanted to pay off what she owed so her friend would have more money available for her own rising expenses.

To do so, Heil turned to a reverse mortgage, a growing trend among senior citizens.

As living expenses–particularly health care costs — rise while incomes remain stagnant, seniors are increasingly finding reverse mortgages a way to remain in their homes and make ends meet.

There are downsides, including the costs–which can be as high as $8,000 to $9,000 for a $150,000 loan, for example–and the fact that consumers essentially give up what for most people is their biggest asset.

Reverse mortgages allow homeowners to draw an income from the equity in their house. Instead of the homeowner paying a lender, the lender pays the homeowner.

Depending on the situation, seniors can get money in a lump sum, as a line of credit or as a monthly payout.

The loans don’t come due until the homeowner moves out of their house or dies. Interest, however, continues to grow.

About 90 percent of reverse mortgages are insured by the federal government. Those are called Home Equity Conversion Mortgages. The minimum age to get one is 62.

In fiscal year 1990, the U.S. Department of Housing and Urban Development insured 157 loans. By 1997, that number had grown to 5,208. By fiscal year 2007, which ended Sept. 30, it had grown to 107,558, according to the National Reverse Mortgage Lenders Association.

Wichitan’s experience

Heil, 76, said she received a letter from Priority Mortgage in Wichita about reverse mortgage opportunities. She closed on her loan about a month ago. She lives off Social Security and a small pension.

She also is using proceeds from the loan to do some remodeling to her townhouse near 21st and Tyler Road.

Heil said she was a little skeptical about the concept of a reverse mortgage at first. She had a lawyer review the details before signing anything.

Heil’s heirs will have the option of selling her house to help pay off the reverse mortgage or living in it and paying off what she owes.

Pluses, minuses of it

Consumers who receive a government-insured reverse mortgage must undergo counseling to ensure they understand the benefits and downsides.

Justin Robinson is a certified counselor at Consumer Credit Counseling Service in Wichita, which provides that counseling.

Through November, he had helped about 110 people in the past two years. The number of reverse-mortgage clients has been steadily growing, he said.

“The biggest reason people get them is incomes are not keeping pace with expenses,” Robinson said.

“I’ve seen several people this week alone who have prescription costs that are $200 a month,” he said. “Social Security benefits aren’t much for a lot of people.”

The positives of a reverse mortgage are that it allows seniors to stay in their home; keep up on property taxes, insurance and maintenance; and have help with other expenses. If they still owe a small amount on their house, a reverse mortgage can eliminate their mortgage payment.

“Depending on the situation, they could get a large sum of money to pay off debts,” Robinson said.

The downsides are that the upfront fees can be expensive, although they are rolled into the loan. Robinson said the fees on a $150,000 loan, for example, can be as high as $8,000 to $9,000.

There are three major charges: an initial mortgage insurance premium, which is 2 percent of the home’s value; a financed origination fee, which is 2 percent of the home’s value or $2,000, whichever is greater; and the typical closing costs associated with a mortgage.

Interest rates vary. The caps on some are as high as 10 percent, Robinson said. Fixed-rate mortgages insured by HUD have been running just more than 6 percent recently, Robinson said Monday.

The biggest con, of course, is that unlike a mortgage that decreases as you pay it, the loan value on a reverse mortgage is going to rise every month.

“You have falling equity, rising debt instead of rising equity, falling debt,” Robinson said. “When you start with this, you’ll owe $5,000 to $10,000 more on your house the very day you sign up for it.”

But for many seniors, the loans make sense as a way–and sometimes, the only way–to stay in their homes.

Making ends meet

Randy Vickers, president of Priority Mortgage, said reverse mortgages processed there have helped save seniors from tax foreclosures and bankruptcies.

Priority Mortgage is averaging about three to five a month, he said.

Most of Priority’s reverse-mortgage clients still owed some balance on their homes, he said. The reverse mortgage allowed them to pay off that loan, freeing up money going toward house payments, as well as pay off other expenses.

“I think it’s about making ends meet,” Vickers said.

The loans are not for everyone, he said.

“You have to plan on staying in the house to make it work, and you have to have a substantial amount of equity,” he said. “If someone is doing well financially, it’s not for them. The majority of what we’re writing is people who are on a fixed income.”

Debora Blume, a spokeswoman for Wells Fargo, which also offers reverse mortgages, said she thinks there are three major reasons for growth in the industry: greater awareness and understanding of the products, an aging U.S. population, and an effort to promote the “benefits and flexibility of the product.”

“Seniors can use the money from the loan for any purpose, and the feature that distinguishes a reverse mortgage from other loans — and makes it so valuable to older homeowners — is that the lender gets repaid only when the home is sold or the borrower dies,” Blume said.

Heil said she would not have been able to repay her friend otherwise.

“I feel a lot better to be able to pay off the bill,” she said.

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