June 8, 2000

Reverse mortgages have come full circle

By TOM KELLY
The Real Estate Advisor

We continue to be reminded of oxymorons, redundancies and contradictions in terms. The latest example was a "totally dead" comment made by our surprised young neighbor. Fabulous Freddy had just asked her to the senior prom and the young lady was clearly searching for something beyond "simply stunned."

Another example surfaced the same day when I got a note from a senior inquiring about the flexibility of reverse mortgages.

"Is not really a reverse mortgage, is it, if it helps me buy my next home?" the woman stated. "Wouldn’t you think it would be more aptly named if it were a full-circle loan."

The woman definitely had a point. Reverse mortgages are a wonderful way for seniors to pull cash out of their homes, but they are no longer restricted to your present home.

"You can take the cash from your family home, use it as a down payment for a retirement condominium and finance the balance with a reverse mortgage," said Ken Keranen, long-time Seattle Mortgage reverse specialist who recently joined Senior Homeonwers Financial Services, Inc. (1-888-480-4422).

Questions and requests for information about reverse mortgages stream in all the time. They often top the monthly "most asked about" category. For folks with no other option -- especially those desperate to find a way to pay rising property taxes so they can keep their homes -- they are a needed niche loan.

Reverse mortgages are loans that allow persons 62 years of age or older to tap into their equity by receiving monthly payments, a line of credit or a lump-sum payment. The loans began in 1989 and required a confidential meeting with an independent, FHA-approved counselor.

They were once offered only through loans insured by the Federal Housing Administration and now are offered by other underwriters. The loans do not have to be repaid as long as the home is the borrower's primary residence. (For a list of Western Washington reverse lenders and helpful tips, see HUD's Web site. Click on "own a home" and then "senior citizens." HUD also can be reached at 1-888-466-3487.)

One of the most confusing fees involved in a reverse mortgage is the mortgage insurance premium. Seniors are usually flabbergasted when they find the amount is 2 percent of the appraised value of their home. Couple that cost with a loan origination fee and standard closing costs, and a borrower can easily spend $6,000 to borrow $319 a month for life.

Why, you ask, should a senior who owns her home free and clear have to pay for mortgage insurance? Unlike typical mortgage insurance that protects the lender if the borrower defaults, mortgage insurance on a reverse mortgage ensures the borrower (or the borrower's estate) will never owe more than the value of the home. That means other assets will never be used to repay the mortgage if the home's value turns out to be less than the loan balance.

And, seniors also don't have to own the home free and clear.

Let's say you net $70,000 on the sale of your family home and use that amount as the down payment on a $120,000 retirement condo. You can take out a reverse mortgage for the $50,000 balance and not make a payment. However, if you live in the condo until you die (based on "actuarial life expectancy") your $70,000 will likely be used up by the interest charged on the $50,000.

"Our typical customer is a woman in her mid-70s whose husband died after retirement," Keranen said. "She can get by on her day-to-day expenses, but the maintenance has been deferred on the house and car. Usually, the best option is for her to take out a line of credit, use $10,000-$20,000 on her immediate needs and save the rest for later." If a homeowner 62 years of age or older has another asset to use as collateral for a loan, the costs involved typically are significantly lower than those incurred with a reverse mortgage.

For example, a person could "margin" a stock (borrow against its value) with a brokerage firm and pay no fee or monthly payments. Interest accrues on the loan but the borrower is not obligated to repay the debt within a specific period. Interest on most margin accounts adjusts monthly as do many reverse mortgage loans. Some reverses adjust annually. The FHA reverses are indexed to the one-year Treasury Bill, and five payment options are usually available:

• Term-- equal payments for a fixed period of time.
  
  
• Tenure period-- equal payments for as long as the home is occupied as the primary residence.
  
  
• Line of Credit-- a maximum amount of cash reserves that can be used periodically and in varied amounts.
  
  
• Modified term-- a line of cash reserves combined with equal monthly payments for a fixed time period.
  
  
• Modified tenure-- a line of cash reserves combined with equal monthly payments.

All of these programs may appear "totally overwhelming" yet they definitely contain long-term "positive benefits."

Previous columns:

• Virtual home tours are a big hit, 06-01-2000
• HUD forced to police its own programs, 05-25-2000
• New factors in local housing market, 05-18-2000
• HomeSeekers building a name for itself, 05-11-2000
• Auctions can offer speed, efficiency, 05-05-2000
• Did Dad spend property taxes on basketball trip to Tucson?, 04-28-2000
• Continental name change severs a bond, 04-14-2000
• Home office may bring deductions, 04-07-2000