Reverse Mortgage Loan Blog

Ann Angle spends her downtime amid brightly colored rugs and attractive furniture with her five-and-a-half-month-old cockerpoo, Tiki.

When she moved in nearly 17 years ago, the closest houses in her River Run neighborhood were occupied by people in their 20s and 30s.

“I wanted to live in a mixed community,” Angle said. “The streets are almost a dead end, they’re quiet and we’re almost next to the park.”

Angle, 75, decided she wanted to stay in her home, which she purchased with cash years ago. But a year and a half ago, Angle started feeling a slight financial squeeze, and she began to think about her future and the “fun things” she might someday want to own. If she wanted to keep the quality of life she had become accustomed to, she would need more money.

Angle’s solution to her problem came on her son’s recommendation - get a reverse mortgage.

These increasingly popular loans allow homeowners 62 and older to draw on the equity of a person’s home, collecting it in the form of cash payments, a line of credit, a lump sum or a combination of the three for the rest of their lives. After the last person in the home leaves, moves out or passes away, the balance of the mortgage becomes due and can be paid by a person’s heirs by selling the home or paying off the loan. Experts say these mortgages are the fastest growing type of mortgage in the United States, and they have projected continued growth for them.

In the Charlottesville area, only one person a year in 1999 and 2000 took out a reverse mortgage; in 2007, 44 people sought out such a mortgage, also known as a home equity conversion mortgage, secured through the Federal Housing Administration. Statewide, 3,059 people got such mortgages in 2007 through the federal agency, a substantial increase from the 1,817 federally insured in 2006 and 973 federally insured in 2005.

The number of people with a reverse mortgage in the Charlottesville area is small, but people like Richard F. DeMong believe it has the potential to grow in upcoming decades. DeMong, the Virginia Bankers Professor of Bank Management at the University of Virginia, said the increase would hinge on baby boomers.

“I think many of the baby boomers are going to be surprised that they don’t have enough savings,” DeMong said. “Folks don’t have the pension funds their parents and grandparents have.”

DeMong said the nation has a negative savings rate, so people are looking at other options to fund their needs. Reverse mortgages are a good option for some retirees, he said.

Researching a decision

In the late 1980s, Congress approved a reverse mortgage pilot program that was originally geared toward widows who were in financial straits. The program was made permanent in the 1990s.

Since the program’s inception, the FHA has insured more than 250,000 reverse mortgages. Most home equity conversion mortgages have a tie to the federal agency; those that don’t aren’t federally guaranteed if the issuing bank shuts down.

Even though Angle thought a reverse mortgage was probably the best option for her, she couldn’t make an application for one immediately. First Angle met with Genevieve Blair, a partner at Compass Home Loans LLC, to talk about her options.

Blair starts conversations like these by discussing all of the client’s options, which include a reverse mortgage. Once a client has decided on one, she has to attend third-party counseling through a federally approved program. In the Charlottesville area, the counseling is offered through the Piedmont Housing Alliance.

Making sure mortgage recipients understand what they’re getting into is important. Inside the AARP-produced “A Consumer’s Guide to Reverse Mortgages,” the agency warns retirees not to take out a reverse mortgage to pay for an item or service unless they do careful research beforehand.

Gordon Walker, CEO of the Jefferson Area Board for Aging, said retirees getting reverse mortgages are prime targets for scammers.

“These scam artists are two miles ahead of us,” Walker said. “People who are trying to encourage people to use equity in the loan to buy something they are selling are going to target that population.”

Besides giving retirees another source of income, reverse mortgages are meant to help them “age within the community,” Walker said. Requiring people to attend a counseling session helps them to see a reverse mortgage is only one of their options.

“Home equity conversion mortgages are one of many options that are available to both a senior and to their family in enabling people to age within community to stay at home,” Walker said. “To me, there are just a lot of safeguards and cautions that need to be exercised before taking out a reverse mortgage, particularly if you’re looking at a lump sum payment.”

Good uses for the money in Walker’s eyes include paying for long-term care insurance, which costs at least $1,500 a year but can be much more expensive the longer retirees wait to obtain it. A bad use, according to DeMong, is to fill a short-term need for cash.

Blair said the money is often used to pay for home care services or other medical costs to prevent the retiree from having to sell her home. The broker has only once issued a reverse mortgage to someone who was already in foreclosure proceedings.

Signing the paperwork

A homeowner cannot draw 100 percent of his home equity with a reverse mortgage; the maximum amount is determined based on the person’s age, the appraised value of his home and the interest rate determined at closing.

Each county sets its own lending limit to determine how much equity can be drawn from a home in a mortgage. In 2007, the limits set across the United States varied from just over $200,000 to about $362,000. The Charlottesville Metropolitan Statistical Area’s limit for 2008 is $323,000, an increase of more than $19,000 from 2007.

One of the criticisms of reverse mortgages is the high costs associated with them. In an example estimate for a 75-year-old homeowner with a house appraised at $325,000 and an initial interest rate of about 4 percent, Blair calculated he could have to pay $15,232.08 in settlement charges. The fees included $6,460 in mortgage insurance, which is required for federal loans, and a $4,844.99 loan origination fee. The homeowner also would be responsible for other fees such as flood certification, an appraisal and title insurance.

The amount of money a homeowner can draw depends on what type of reverse mortgage he gets. In Blair’s example, the homeowner could get tenure payments of around $1,300 monthly if he chose an FHA-insured home equity conversion mortgage. He also could get his net principal limit, estimated at about $215,000, in a line of credit or as a lump sum payment.

The homeowner’s options change if he gets a reverse mortgage through a private lender like Fannie Mae, in part because of different interest rates and settlement costs.

Blair has done reverse mortgages for homes appraised at $60,000 up to $1.25 million. Angle declined to reveal her home’s value for this story.

Blair sees two types of reverse mortgage clients - those who are in financial straits and those who just want to maintain their lifestyle, such as Angle. Angle said she decided to get a reverse mortgage because she didn’t want to become stressed about her finances.

“I live pretty well on little,” Angle said. “I’m quite comfortable. I can order my books, I bought my dog … it has made the difference in feeling a little tightening and having to stop and think about, ‘do I buy it this month or the next?’”

Sometimes families can complicate the mortgages, especially if a person’s child is expecting to inherit the house. While that wasn’t a problem for Angle, Blair said a discussion about inheritance sometimes takes place during the process.

Spending money

Over a series of meetings with Blair, Angle learned more about reverse mortgages and signed numerous papers. As a mini-lender through the FHA, Compass was able to handle Angle’s application through the whole process, which Blair said usually takes 30 days once a client completes the required counseling session.

Payouts for home equity conversion mortgages vary depending primarily on the type of reverse mortgage, the cost of the property and the age of the youngest person in the home.

Blair said a reverse mortgage’s tenure payments are paid out based on a 100-year life span, but those who remain in their home past that age will continue to receive payments.

Angle chose to receive her equity through a line of credit and a monthly check. While the UVa sports fan thought she’d spend some of her money on a large television to watch the Cavaliers in better resolution, Angle hasn’t made that purchase. Instead, she just deposits her money with the rest of her income like it was another check.

Blair said most people who are interested in reverse mortgages are about 70 years old. Generational differences between Angle and baby boomers will continue to be obvious as both groups age.

“For a lot of people who experienced the Depression, their primary asset was their home,” Walker said. “They always targeted that as something to pass on to younger generations. I don’t necessarily think that will be the case with future generations. They will be using it to travel or to meet their own personal needs rather than to pass it on to children.”

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