What subject generates the most mail for the American Association of Retired Persons? Not taxes, not Social Security, not health. It’s the reverse mortgage, which holds tremendous potential for raising senior citizens’ standards of living and helping them with their medical costs.
This tiny market took an important step forward recently when, for the first time, a major company entered the field. Transamerica, based in San Francisco, will not only be adding financial muscle. Through its subsidiary, Transamerica HomeFirst, it will also offer a better product: an income that lasts for as long as you live.
A reverse mortgage taps the equity that’s locked up in your house, turning it into a steady and non-taxable income. There are several sources of these loans, none of them yet very widespread.
Scattered lenders in 43 states, including Illinois, provide loans insured by the Federal Housing Administration, though they have been slow to develop in the Chicago area and other parts of the country.
Working in reverse
Here’s how a reverse mortgage works:
A lender agrees to advance you money against the value of your house. But unlike a regular home mortgage, the money isn’t paid all at once. Instead, you draw on it over time.
You can take the money in a couple of ways: as a fixed monthly income or as an open line of credit to use when you wish. You also might get a lump sum upfront, to pay off what remains of your regular mortgage, make home repairs or give yourself the vacation of your life. This income is not taxable, because it comes in the form of a loan.
The lender charges regular mortgage-closing costs. But you may not need any cash upfront because these costs can be subsumed in the loan. Nor do you make any monthly repayments.
Normally, you can stay in the house as long as you choose. When the place is finally sold (because you leave it or die), the proceeds are used to repay the loan and all the accumulated interest. The lender may also be entitled to some of the appreciated value of the house. But whatever happens, you’ll never owe more than the house is worth.
The annuity option
Most reverse mortgages pay you an income only as long as you stay in the house. But Transamerica HomeFirst does better than that. After a certain number of years, your loan income turns into an annuity for life. The annuity will be provided either by Metropolitan Life or Transamerica Occidental Life. So you’ll still have that extra income if you have to live somewhere else. (Note that annuity income is partly taxable, if you owe any tax; also, it may exclude you from certain welfare programs.)
To see how this loan might work, take a 75-year-old California widow, living in a home worth $257,000. She might take a lifetime income of $550 a month, plus $18,500 upfront, plus a $7,500 line of credit. She’ll owe 10.5 percent on the mortgage and 12.5 percent on the credit line. When she sells the house, she’ll split its appreciation 50-50 with Transamerica HomeFirst.
Because she pays nothing as long as she remains in the house, the interest compounds and the debt eventually grows quite large. But although this loan isn’t cheap upfront, neither is it like a regular loan, says Peter Mazonas, president of Transamerica HomeFirst. Transamerica gets no monthly repayments, the debt compounds, and the borrower gets an income for life.
Right now, this loan is available only to California residents, but next in line will be the East Coast and the Midwest, Mazonas says.
Reverse mortgages are best used by senior senior citizens. That’s because the older you are, the higher the monthly payment you’ll get.
Kenneth Scholen, an expert in reverse mortgages who helped develop the Transamerica product, says it lets you tap more equity from a high-value house than you’d get from the similar FHA-insured program. If you sell your home too soon, however, there will be a break in your monthly payments. The loan income stops when you leave the house, and the annuity won’t start until the year that was specified. To fill the gap, you’d use the net proceeds from the sale of your home.
To find other reverse lenders, including those in the FHA program, send $1 and a self-addressed, stamped, business-size envelope to the Reverse Mortgage Locator, Suite 115, 7373 147th St. West, Apple Valley, Minn. 55124.
