Reverse Mortgage Loan Blog

Homeowners who take out loans based on their equity are multiplying

All the television commercials about reverse mortgages caught Pat King’s attention.

Digging deeper, the Jacksonville homeowner went last week to the Housing Partnership of Northeast Florida for a reverse mortgage seminar sponsored by Wells Fargo.

“You have all the blurbs out there on TV, and we thought we would come and see what it’s all about,” she said.

Her verdict: She’s intrigued, but still wants to do more research because the loans are so different from her experience with regular home mortgages.

“You have to literally think in reverse,” she said.

Offered to homeowners 62 and older, reverse mortgages have picked up steam the past three years. In 2007, federally insured reverse mortgages grew by 27 percent, according to the National Reverse Mortgage Lenders Association, a trade group based in Washington.

In contrast to the “credit crunch” that has tightened lending nationwide, reverse mortgages have gone unscathed because they are a different kind of loan, said Liz Scholz, executive vice president of the National Reverse Mortgage Lenders Association.

Reverse mortgages don’t require repayment so long as the borrower lives in the home. As a result, borrowers don’t have to show proof of future income or meet a credit threshold.

When the borrower dies or moves, the reverse mortgage comes due with interest. Ninety percent of reverse mortgages are issued though the Home Equity Conversion Mortgage program, which is insured by the Federal Housing Administration. In those loans, the debt can never exceed the value of the home, no matter how long the borrower lives in it.

Proceeds of the loan are tax-free and usable for any purpose. Paying off an existing mortgage, doing home repairs, and “improving quality of life” are three top uses of the money, according to an AARP survey released in December.

A growing trend

Last year, 786 new lenders became active players in the reverse mortgage market, boosting the nationwide total to 1,674, the association says.

“It’s a new trend that’s coming on,” said Remer Budreau, president of Mortgage Resources in Jacksonville.

His company recently began vying for a piece of the local market by running television commercials that show an elderly couple sitting on a sofa while they discuss reverse mortgages.

“It’s just been a really dramatic escalation in demand and there are so many more lenders,” said Bronwyn Belling, a reverse mortgage specialist at AARP Foundation. “It’s become more mainstream.”

Belling said reverse mortgages can be useful in some circumstances for seniors, provided they understand how the loans work. She said loan-related fees make reverse mortgages high-priced at the front end, so borrowers should consider other options that might be more affordable.

“The loans work best when you intend to live there for a long time,” she said. “A lot of homeowners tell us they want to be carried out of their homes feet first.”

How a loan works

The amount of loan is based on the home’s value and borrower’s age - the higher the value and older the borrower, the bigger the loan.

For instance, a 62-year-old Jacksonville owner of a $200,000 home could receive a $107,266 lump sum, or a monthly loan advance of $584 as long as he lives in the house, according to a calculator sponsored by AARP. A 75-year-old owner of a $200,000 home in Jacksonville could get a single lump sum of $127,549 or monthly payments of $793.

Another option is a credit line, which is the most popular choice for borrowers. Home-owners can draw from the credit line as needed, and the lender charges interest only on money that’s withdrawn. Whatever remains in the credit account will automatically grow tax-free in value. For instance, someone who started with a $107,266 credit line would see it grow to about $138,000 in five years if none of the available credit were used, according to AARP.

“It’s a rainy-day fund and FHA rewards them [borrowers] for being prudent with that,” said Marshall Gallop, a reverse mortgage consultant for Wells Fargo Home Mortgage in Jacksonville.

Key players locally

Wells Fargo leads the pack in making federally insured reverse mortgages, capturing 20 percent of the market in 2007, according to the National Reserve Mortgage Lending Association. Financial Freedom Senior Funding - actor James Garner is its advertising pitchman - came in second with 11 percent, followed by Bank of America at 2.4 percent.

Jacksonville-based Everbank also is a national player, ranking eighth. EverBank has predicted a 50 percent increase in reverse mortgages in 2008.

Regardless of lender, borrowers getting a federally insured reverse mortgage will pay high upfront costs. FHA requires borrowers buy a mortgage insurance premium equal to 2 percent of the home’s value. FHA also lets lenders charge an origination fee of up to 2 percent of the home’s value.

Homeowners who shop around can find origination fees for less than 2 percent, but the tradeoff is the loan will have a higher interest rate for repayment, said Joe DeMarkey, director of corporate development for Everbank Reverse.

Herb Helsel, executive director of the Jacksonville-Duval County Council on Elder Affairs, said he has “cautious optimism” about the benefits of reverse mortgages.

Helsel counts himself among those getting up to speed on the issue. On his desk at the Singleton Senior Center, he has an inch-thick report from AARP that takes stock of the pros and cons. He said as the market expands with baby boomers retiring, he worries about the potential for fraud.

“It offers opportunities to seniors, and they need to be careful that in any field, there are people who are very reputable, and there are people who take advantage,” he said.

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