Tate and Leonie Baker of Bethesda, Md., are seniors with attitude.
At 76 and 74, they pull no punches about their beliefs. Longtime volunteers with a group that exposes seedy funeral home practices and educates about death and dying, the couple are apt to quiz new acquaintances immediately about wills and burial plans.
So when you ask why the couple, who have been married for 53 years, recently took out a reverse mortgage on their home, which cost them $44,000 when they bought it and could fetch $300,000 today, they are equally blunt.
“We need more money,” Leonie Baker said.
With their income flat for the past four years, stocks deflating and medical and living expenses rising, “we were looking for a way that we could get more cash on a monthly basis,” said Tate Baker, a World War II veteran. “We were running out of dough.”
Interest in home equity loans and reverse mortgages is at record highs.
The big attraction of a reverse mortgage, a loan available to people 62 and older who have equity in their homes, is that the loan typically does not have to be paid back until the owner dies, sells the home or moves out for a year.
If the owner’s heirs want to keep the home, they can use money from the estate or other sources to pay off the loan.
Reverse mortgages work like a regular mortgage, only in reverse. Instead of the borrower sending a payment to the lender, the lender sends a payment to the borrower.
The lender’s equity grows each year, rather than the borrower’s. The title remains with the borrower, as long as the property taxes and insurance are paid and the property is maintained. When the last surviving borrower moves out, sells or dies, the loan must be repaid. The borrower can never owe more than the value of the house to which the lender has agreed.
The amount of money a borrower gets depends on several variables, including the property’s value, the costs associated with the type of loan product, the borrower’s age, and state and federal regulations, said Ken Scholen, founder of the National Center for Home Equity Conversion, a non-profit group founded 20 years ago to educate consumers about reverse mortgages.
The loan payout can be in the form of monthly payments, a credit line, a lump sum or some combination, though about 75 percent of borrowers choose the credit line, said Fannie Mae, the only secondary-market buyer of the loans to date.
With three different loan products carrying different costs and interest rates, the calculations can be daunting, consumer and industry groups admit.
Borrowers need to understand that their age plays a big role in the calculations, which set loans to match life expectancies. Though the deal may look appealing at 62, the younger the borrower, the less money the borrower can receive.
“At age 62, a borrower could get roughly 30 percent to 35 percent of the value of the house,” Scholen said. “At 75, they’d get about 45 percent to 55 percent. Those 80 and older get more.” The typical borrower is 75 to 76 years old, he said.
“It’s a personal decision” that some seniors won’t even contemplate, having lived through the Depression and vowed to own their home free and clear, said Bronwyn Belling, AARP’s reverse-mortgage expert. “But it may make sense for some people to use the equity that’s built up in their home, if they need it, while they’re still alive.”
Scholen’s non-profit group and AARP worked for years with federal housing agencies to develop federally insured reverse mortgages with limits on closing costs and fees.
The first and only federally backed program, the Home Equity Conversion Mortgage (HECM), began as a demonstration in 1989 and is now the loan of choice for more than 90 percent of the borrowers.
Once the Federal Housing Administration (FHA) started insuring reverse mortgages and Fannie Mae developed a similar program in 1995 called the Home Keeper, interest began to climb.
The number of federally insured reverse mortgages jumped to about 7,000 last year, from less than 300 in 1990.
The slumping economy and a new AARP marketing campaign have generated even more interest, industry and AARP officials said. Seniors are scrambling to make up for lost investment income, according to Belling and Peter Bell, president of the Washington-based National Reverse Mortgage Lenders Association.
“Our phones are twice as busy as they were last year,” said Patty Willis, mid-Atlantic manager for Financial Freedom Senior Funding Corp. of Irvine, Calif., the nation’s largest originator and servicer of reverse-mortgage products.
“Part of it is the stock market,” she said. “People who have lost money they expected to get are looking to use other assets to meet expenses. Part is that they are more familiar with reverse mortgages and more comfortable with it.”
AARP and industry officials said there are hundreds of thousands of homeowners who might benefit but are leery because the transaction is complicated and carries higher costs than a regular mortgage.
Costs are similar to those in conventional mortgages, but the insured mortgages cost more because of a required government mortgage insurance premium. The insurance is protection for the lender.
Costs are dropping as more loans are made, HUD said. The median closing cost fell to $3,400 in 1999, from $4,465 in 1995.
While the loan proceeds can be used to pay for any number of things, Bell’s group of late has been stressing its usefulness in covering health-care costs. Congress last year passed legislation that waives the required mortgage insurance for federally insured loans if the money is redirected to long-term health coverage.
Belling cautioned, however, that reverse mortgages may not be the best solution for everyone.
AARP recommends that potential borrowers consider buying a less expensive house, renting an apartment or moving to an assisted-living center when making comparisons.
If a borrower can qualify for a low-cost home equity loan and make the required monthly repayments, that would be much less costly in the short term, AARP said. A reverse mortgage would also be expensive for those who expect to sell their house in a couple of years.
Financial counseling is required for all the reverse-mortgage programs.
Belling warns seniors to watch out for those who push them to take out a reverse mortgage, including family and friends who might want to tap a credit line or lump-sum payment.
“If you’re following the advice of someone who doesn’t have your best interests in mind, it’s always a risky arrangement,” she said.
Dorothy Marie Barnes, 73, a Washington homeowner who got a reverse mortgage this spring, said no one could make up her mind for her when it comes to money. She gets her counseling, she said, “from the Lord and from me.”
Barnes started looking into a reverse mortgage about a year ago, she said, “when all my life savings was gone, and I owed about $4,000 in credit cards.”
“I’m very pleased by the way it turned out,” said Barnes, who added that the counseling was done by phone and the closing was held at her house.
THE NUTS AND BOLTS OF REVERSE MORTGAGES
Reverse mortgage borrowers have three products to choose from in most parts of the country. All require that the borrower be at least 62 years old and have title to the house. You can have an outstanding mortgage, but you have to pay it off with the new loan.
Two of the three products offer payouts in a lump sum, monthly, as a credit line or in some combination. The Financial Freedom Cash Account comes as a line of credit or a lump sum. Each product has its own guidelines on interest rates, loan limits and costs that can be charged and financed through the mortgage.
Here are the three products:
– Home Equity Conversion Mortgage (HECM). These are made by private lenders and insured by the Federal Housing Administration. Only FHA-approved lenders can originate HECMs. Borrowers must receive counseling from a HUD-approved counseling agency before they can apply.
HECMs are the product of choice for most people with properties worth less than $400,000 because of limits on the costs of getting such a mortgage and because the credit limit grows over time at the same rate of interest as the loan, said Peter Bell, president of the non-profit National Reverse Mortgage Lenders Association.
– Home Keeper mortgage. Fannie Mae developed this product because the FHA loan limits for reverse mortgages were low in many parts of the country, according to Fannie. Those limits, which are the same as those for regular mortgages, are raised annually. They vary from county to county and can be quite low in rural areas.
As FHA has raised its loan limits over the years, experts say the relative value of the Home Keeper product has declined. FHA’s limit in high-cost areas is $239,250. Fannie’s loan limit is $275,000 nationwide.
Fannie Mae acknowledges that “HECM is the better choice for 98 out of 100 seniors,” said Tom Atwell, Fannie Mae’s senior product manager.
– Financial Freedom Cash Account, offered by private lenders in 21 states, including Illinois. The product, developed by Financial Freedom Senior Funding Corp. of Irvine, Calif., is considered a jumbo reverse mortgage because it has no loan limit. The product “works best for those with houses over $400,000,” said Bell.
For information:
– AARP will mail a free copy of its 68-page booklet, “Home Made Money: A Consumer’s Guide to Reverse Mortgages.” It can be ordered by calling 800-209-8085 or can be ordered over AARP’s Web site, www.aarp.org/revmort.
– The National Reverse Mortgage Lenders Association has two free consumer guides. “The NRMLA Consumer Guide to Reverse Mortgages” and “Using Reverse Mortgages for Health Care” can be ordered by calling toll-free 866-264-4466. The group’s Web site, www.reversemortgage.org, lists reverse-mortgage lenders by state who belong to NRMLA and have agreed to its “best practices” code of conduct.
– Fannie Mae has a free guide called “Money From Home.” The publication is available by calling 800-732-6643.
– The National Center for Home Equity Conversion Mortgage, a national non-profit group with no links to the lending industry, has information at its Web site, www.reverse.org.
– Financial Freedom Senior Funding Corp. has a calculator at www.financialfreedom.com. The site also offers information about the company’s jumbo reverse-mortgage product, Cash Account, and two other alternatives. Call 888-738-3773.
