Reverse Mortgage Loan Blog

Marilynn Engerran had a hard time keeping the lights on in her Richwood home, and her monthly Social Security checks were not enough.

Engerran, 65, didn’t know what to do. It was 2003 and her husband had died two years before. Engerran’s income couldn’t take care of the electricity payments, her outstanding mortgage, home repairs and everything else she needed to get by, she said.

Then one day a piece of direct mail advertising landed in her box and solved all her problems, she said.

The postcard solicitation was promoting what is called a reverse mortgage, Engerran said.

Reverse mortgages are offered by lenders to those older than 62. The lender offers the loan with the person’s home as collateral. When the person dies or sells the home, the bank collects the loan value, interest and fees either from the person’s estate or from the home’s sale.

Engerran said it was a blessing for her and it helped her financial situation tremendously.

“It gave me cash to make needed repairs,” said Engerran, now 71. “It gave me cash to live. It gave me freedom.”

As the national economy continues to slump and seniors are taking hits on retirement plans, more are turning to reverse mortgages as a source for money.

The Federal Housing Administration, which insures 90 percent of reverse mortgages, reports the number of such mortgages in the Houston metropolitan area have surged from 762 in the 2005 fiscal year to 1,817 in the 2008 fiscal year.

So far in 2009, national statistics are about 5 percent ahead of last year’s numbers, said Darryl Hicks, vice president of communications for the National Reverse Mortgage Lender’s Association.

HOW IT WORKS

Homeowners who opt for a reverse mortgage can’t do so unless they’ve had counseling from someone certified by the Federal Housing Administration. The counseling is done in an effort to inform potential reverse mortgage borrowers about what they’re getting into, officials said.

Only those who are 62 and older, either own their home or have a small portion left on an outstanding mortgage are eligible to receive such a loan, according to the housing administration. The amount of money and interest rates available to borrowers is based on a formula that takes into account their age, the value of their home and the area where they live.

The National Reverse Mortgage Lenders Association has a calculator on its Web site at reverse mortgage.org to help people figure out how much they can possibly get.

The formula helps ensure the borrower or their estate never have to pay back more than the value of their home, Hicks said.

“The amount of money you can get depends on how old you are,” he said.

The borrower can receive the money as tax-free income either in a lump sum or in monthly payments, Hicks said. About 60 percent of reverse mortgages are used to create a line of credit where borrowers can draw on the proceeds when needed.

Engerran said she used the $30,000 on her reverse mortgage to pay off her outstanding $15,000 mortgage, make repairs to the house and for everyday living expenses.

The loan creates a lien on the home and it has to be paid back when the owner stops occupying the house or dies, officials said.

Engerran moved from her home and when it was sold, she paid off her reverse mortgage all at once and kept the rest for herself, she said.

If a person dies, the heirs or the person’s estate must pay the outstanding balance, which will include fees and interest, said Donna Lalumandier, a partner with JDH Capital Mortgage Company in Lake Jackson.

“It’s up to the estate to pay off the lien,” she said. “At no time would the estate owe more than what the house sells for.”

If they don’t pay off the due balance, the home is sold and the bank gets its share for the mortgage and the rest goes to the heirs, according to the Federal Housing Administration.

In those rare instances where the home sells for less than the value of the mortgage, the administration insurance fills in the rest to make the lender whole, Hicks said.

NOT FOR EVERYONE

Lenders and real estate experts in Brazoria County are quick to cautionreverse mortgages are rare in the area and are not meant for everyone.

“Anyone who wants to do that needs to really check out what they’re doing,” said Donna Peiser, owner-broker with Century 21 Real Estate Plus. “I really see it as a last resort.”

Some will not use their home to take out a loan because it’s their life’s biggest investment, Hicks said.

“There will always be people who just don’t want to use their home for a loan,” he said.

Passing a home or property to your children is a strong Texas tradition, and reverse mortgages really go against cultural grain in the area, Lalumandier said.

“People here are very conservative,” she said. “My parents, I would not want them to have that. Their house is built on land we’ve owned for 100 years.”

Those wanting to leave their property to their children after they’re gone probably shouldn’t consider reverse mortgage, experts said.

“If you’re looking to pass your home to your heirs, there may be better options,” Hicks said.

In fact, lenders and real estate experts said those considering a reverse mortgage need to make sure their heirs know what’s happening, and they should be involved with the process.

Which is exactly what Engerran did when she set up her reverse mortgage.

“I had my kids sit in on the meeting” with the lender, she said. “I wanted to get their input.”

Engerran has since remarried and sold her home. She now lives in a Lake Jackson apartment with her husband.

Though many seniors want to leave their home for their children, Engerran said she has no regrets with her decision and her children understood that.

“If a woman needs something to live on, I don’t think you need to worry about what you’re passing on,” Engerran said. “It worked perfectly for me.”

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