Reverse Mortgage Loan Blog

About a third of the people Buz Zeman counsels about reverse mortgages decide they’re the best deal they’ve ever seen. Another third think they’re the worst.

The rest tend to think a reverse mortgage might be a good option, but only after they’ve used up other resources, he said.

“It’s a very individual decision,” said Zeman, director of Housing Options Provided for the Elderly, one of four agencies in the St. Louis area that the Department of Housing and Urban Development lists as qualified to provide counseling for those considering a reverse mortgage.

Zeman says counseling is key because the mortgages can be complicated and, in some cases, costly. Unfortunately, a dearth of qualified counselors has prompted some lenders to refer clients to counselors accessible only by phone or online.

Bronwyn Belling, a reverse mortgage specialist with the AARP Foundation, said, “This is a major significant financial transaction. It involves (the homeowners’) major - and, in many cases, their only - significant asset.”

Some people who think they need a reverse mortgage might be helped more with property-tax assistance, a home repair-assistance program or some other less-costly help, Belling said.

Belling said AARP, the nonprofit group for people 50 and older, warns consumers to beware of anyone urging them to get a reverse mortgage and then to buy another financial product.

“It’s usually a losing proposition,” because the fees and interest paid on the reverse mortgage often are more than could be gained with the investment, she said.

Kent Lohmann, of Frontier Home Mortgage in Creve Coeur, agreed that many people don’t understand reverse mortgages. But he said the loans can be a godsend for older people who lack savings to supplement Social Security, pensions or other sources of retirement income.

The number of reverse mortgages has skyrocketed in recent years, to 107,000 in 2007 from 37,000 in 2004. That growth inspired the website Golden Gateway Financial (goldengateway.com), which allows consumers to search a variety of lenders for the mortgages, said Eric Bachman, chief executive. Golden Gateway gets a commission for connecting potential borrowers with lenders.

Reverse mortgages are available only to people at least 62 years old who own and live in their homes. The amount a borrower can receive from the loan depends on age, starting at 62 with about 55 percent of the house’s value and maxing out at about 85 percent at age 95. The exact amount depends on the interest rate. In the St. Louis area, the loans are limited to a percentage of $213,750, the equity limit for the area.

For a reverse mortgage to make sense, the person or couple must have enough equity in the house to justify the cost of the loan - usually at least 50 percent equity. Zeman says reverse mortgages also should be for long-term use. The costs make them unsuitable for short-term loans.

If the property is mortgaged, a portion of the new loan is used to pay off the existing loan when the reverse mortgage closes. That reduces the proceeds, but it also eliminates monthly mortgage payments. The borrower still pays for insurance and taxes.

The most common type of loan, and the one with the most built-in consumer protections, is a Home Equity Conversion Mortgage insured by the Federal Housing Administration. The loans have a variable rate, usually tied to the one-year Treasury bill.

The borrower makes no payments as long as he or she lives in the house. The loan is repaid when the borrower dies, sells the house or moves out. Proceeds from a sale repay the mortgage, with anything left reverting to the borrower or her estate.

Closing costs for reverse mortgages are higher than for other mortgages. With HECM loans, they’re limited to 5 percent of the value of a house in the $100,000 to $213,750 range. Fees include a 2 percent mortgage-insurance premium, up to a 2 percent loan-origination fee and up to 1 percent for costs including title insurance, recording and appraisal fees. The costs can be higher on a percentage basis for lower-value houses because the loan-origination fees can be as high as $2,000.

Borrowers should ask for disclosure of all fees before the closing date. The lender should provide it 24 hours before closing.

In addition, borrowers must decide whether they want to receive funds as a monthly payment, a lump sum, a line of credit or a combination. For example, if a borrower needs $5,000 for house repairs, he could draw that amount as a lump sum, then opt to get the rest as monthly payments or get a line of credit to draw on as needed.

Zeman said borrowers should consider options other than a reverse mortgage, such as selling the house and finding alternate housing or getting a home equity line if money is needed for repairs or to pay a single large expense.

Zeman recommends that consumers find a counselor who is willing to meet with them in person and spend at least an hour reviewing their financial situation and their options. The counselor should welcome the presence of other family members or advisers at the session.

A list of approved counselors is available by calling 1-800-569-4287 or by searching HUD’s website at www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm (click on “HUD-approved HECM counseling agencies”).

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