A mortgage that pays you back

Some seniors find 'reverse' plans let them tap home equity when they need it most

Dorothy Rogers helped her husband, John, build their Hampton, N.H., home in 1955.

About two decades later, Mr. Rogers died - just 20 days short of retirement. And she came close to losing the place.

"I lost John, his insurance, and most of his pension," Mrs. Rogers recalls. "I received a little of his pension, but it lasted only about one year." Social Security kept her barely afloat, but it was outpaced by inflation.

It's a relatively common problem among senior citizens: Although they own their homes, they don't have enough money to handle unexpected expenses and increasing property taxes.

The answer for Rogers - and for a small but increasing number of seniors: a reverse mortgage.

These loans pay the homeowner, in a monthly payment or one lump sum, using the equity in their house as a source of funds. The loan does not have to be repaid until the house is vacated.

In November 2000, Rogers went to Wells Fargo Home Mortgage and closed on a $77,000 FHA Home Equity Conversion Mortgage.

She now receives more than $600 a month in extra income.

Such arrangements are beginning to get wider attention.

"There is not a huge demand, only something like 70,000 of these loans have been made in the past 10 years," said Phil Storms, a certified financial planner in Denver, Co. "Many seniors have a strong emotional commitment to leave something to their kids. And the house is usually their biggest asset."

Tom Atwell is senior business manager at Fannie Mae, the company that purchases virtually all of the reverse mortgages that are initiated.

"In 1998, 7,699 loans were purchased, in 1999, 8,369," says Mr. Atwell. "In 2000 we actually dropped to 7,319. However, we have acquired 4,454 loans through June of this year, which will probably mean a record year."

Others confirm the rise.

"Anecdotally, members of the NRMLA who originate and service reverse mortgages are all experiencing tremendous growth this year, and expect that number to increase," says Peter Bell, executive director of the nonprofit National Reverse Mortgage Lenders Association (NRMLA).

There are some compelling reasons to consider these Home Equity Conversion Mortgages (HECMs), according to the NRMLA. The association publishes a free informational booklet titled "Using Reverse Mortgages for Health Care: A NRMLA Guide for Consumers."

As the booklet describes, seniors can use funds from reverse mortgages to pay for a variety of healthcare-related expenses not normally covered by Medicare. They include in- home care, long-term care insurance, Medigap insurance, and prescription drugs that may not be covered by Medicare.

The booklet may be obtained by calling NRMLA (866-264-4466), or visiting its website (www.reversemortgage.com).

In addition to being a resource for medical expenses, the proceeds from a reverse mortgage can be used for any purpose, such as education, paying off debts, enjoying a better lifestyle, or even investing.

HECMs offer some distinct advantages over normal home-equity loans, says Atwell.

"With a reverse mortgage, no payments have to be made as long as the borrowers remain in the home. Home-equity loans require monthly payments."

Homeowners must be at least 62 years old, with little or no mortgage on their primary residence to be eligible for a reverse mortgage. But Mr. Storms suggests waiting until at least age 70.

"These are not very good for the average 62-year-old, because the long remaining life expectancy reduces the funds available. People between 70 and 80 have a different situation and must deal with long-term care issues."

Remaining life expectancy is a critical part of the formula for determining the amount of money that will be lent to a reverse-mortgage borrower.

The loan must be repaid from the sale or refinancing of the house when the surviving spouse is gone. So the loan amount is designed to be less than the value of the house.

"Homeowners may take a 'tenure loan,' which will make payments to them until they vacate the property," Atwell explains. " A line-of-credit loan is also available, where the borrower may draw on the funds when they are needed."

About 75 percent of the loans handled by Fannie Mae have this feature, he says. And many seniors take a combination of a line of credit and a tenure loan.

"The proceeds from a Home Equity Conversion Loan are not taxable. And the funds may be gifted to children and grandchildren if the homeowner doesn't need the proceeds," says Storms. "The survivors have a choice of paying off the loan, refinancing the loan, or walking away from the house."

There are drawbacks. "Seniors considering a HECM loan should be aware of the up-front fees. They can be fairly hefty," says Storms.

Normal mortgage closing costs apply to these loans, and can amount to 5 to 7 percent of the total loan amount. Most of these loans are insured by the Federal Housing Authority (FHA) and include an up-front fee in addition to an annual premium.

Borrowers should plan to remain in the house for several years before incurring these expenses.

"Everybody should look and evaluate these options as they grow older. This should be a logical, rather than emotional, decision," counsels Storms.

"We like to give as much information as we can, so consumers can make their own decisions," says Mr. Atwell.

Fannie Mae (800-732-6643) can offer basic information and a list of lenders in your area.

Another source of information about reverse mortgages: AARP, formerly the American Association of Retired Persons (www.aarp.org). You can also call AARP at 800-424-3410.

SECURE: Dorothy Rogers lives in the Hampton, N.H., house she built in 1955 with her late husband. She credits a reverse mortgage with allowing her to keep the property.

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