Reverse mortgage can offer security to senior citizens
A growing number use the service to supplement their incomes
By MICHAEL BRAGA
michael.braga@heraldtribune.com
Ronnalyn Crain plans to retire in about three years, but she’s not as worried about her finances as she was in the past.
Crain has accumulated modest savings from her career as a rental property manager. She’s expecting a monthly Social Security check from the government. But what’s really going to put her over the top, she says, is a reverse mortgage.
That will allow her to tap into the roughly $300,000 in equity she has built in the house she purchased for $32,000 in 1972.
“The reverse mortgage is going to be my gravy,” Crain said.
Reverse mortgages have been around since the early 1990s, but their popularity has only recently increased among senior citizens qualified to apply for them.
About 50,000 of the roughly 13 million Americans eligible for reverse mortgages availed themselves of the product during the 12-month period ended Sept. 30, the National Reverse Mortgage Lenders Association reports.
Still, that number is up dramatically from the 7,000 reverse mortgages made in 2000.
Lenders say the growth is because of new legislation and successful litigation that have resulted in more protection for borrowers than in the past. And with baby boomers on the verge of retirement, the product is expected to take off in the near future.
“This industry offers a tremendous potential for growth,” said Stewart Ogilby, a 72-year-old reverse mortgage specialist who recently opened a Sarasota office under the name Reverse Mortgage Sales.
What is a reverse mortgage?
With a traditional mortgage or home equity loan, a borrower obtains money from a bank and repays it with interest in monthly installments.
With a reverse mortgage, a borrower doesn’t have to pay a penny to the bank until he or she is dead and/or the house is sold.
The only requirements are that homeowners be 62 or over and that the reverse mortgage can pay off existing debt.
The older the homeowners, the more their homes are worth and the lower the prevailing interest rates, the more money they can borrow.
They can obtain the money in a lump sum, set up a credit line or receive regular monthly payments. And they can use the funds for anything they want.
Take two of Ogilby’s clients.
One of them is a Venice woman who obtained a reverse mortgage several years ago.
She had been recently widowed at the time and her only income was a $750 Social Security check, Ogilby said.
Most of her money went to paying a small mortgage on her $125,000 home. So the woman had to take a part-time job at a nursing home to cover her living expenses.
With an $85,000 reverse mortgage, however, the woman was able to quit her job, pay off her mortgage, buy a new car and add about $50,000 to savings, Ogilby said.
At the other end of the spectrum is a couple who live in Jacksonville Beach. They tapped into their $2 million home for an $800,000 reverse mortgage, using $25,000 of the money to build an elevator.
“The wife wanted an elevator, but the husband thought they couldn’t afford it,” Ogilby said.
Bad reputation and high costs
Joni Underwood, a reverse mortgage specialist with Mortgage Trust in Sarasota, said the typical reverse mortgage borrower in the Sarasota-Bradenton area has a house that’s worth about $350,000.
If that person is 62, he or she can borrow $126,000 or $744 per month. At 72, the limit is $151,000 or $983 per month, while at 82, the limit is $178,000 or $1,400 per month.
“There’s no stipulation on the use of the funds,” Underwood said. “The borrowers never lose title to their homes as long as they continue to maintain them and pay taxes.”
Lenders say the main reason more people aren’t getting reverse mortgages is that they don’t understand them and traditional lenders haven’t been very good at explaining them.
Reverse mortgages are also complicated to make, requiring more processing and paperwork than traditional loans.
“It takes special expertise,” said John O’Neill, chief executive of Sarasota’s Century Bank, which is not currently in the reverse mortgage business. “You really have to start a division to manage them.”
What made things even more difficult was that reverse mortgages gained a bad reputation in the early years because of unscrupulous lenders.
One company in particular, TransAmerica Home First, vexed borrowers by including “equity share” provisions in some of its reverse mortgages, allowing the company to keep 50 percent of the profits from the eventual sale of the borrower’s house.
Thanks to efforts made by the American Association of Retired Persons, “equity share” provisions have been excluded from reverse mortgages, and TransAmerica is no longer in the reverse mortgage business.
“The financial model is now secure,” said Bronwyn Belling, AARP’s reverse mortgage specialist. “For many seniors, it’s the way they can tap equity in their homes.”
But Belling warned that reverse mortgages aren’t for everyone and they’re expensive. Origination and processing costs can run as high as 8 percent of the value of a home.
“They’re not something that should be entered into precipitously or under pressure from a lender,” Belling said.
That’s why she recommends reading AARP’s 46-page book on reverse mortgages and exploring alternative financing with qualified advisers before proceeding. To get the book, call 800-209-8085.
You can’t take it with you
There’s nothing that irritates specialists more than AARP’s claim that reverse mortgages are expensive.
It’s true that closing costs can run as high as 8 percent of the value of a home, or about 3 percent more than a traditional home equity loan. It’s also true that interest rates on these loans are adjustable and can pile up over time.
But many seniors can’t get traditional loans because they don’t have the income to support them.
In most cases, the appreciation of a house over time will more than cover accumulated interest, permitting heirs to sell the property, pay off the debt and keep some money for themselves.
In remaining cases, there’s mortgage insurance, which protects heirs from having to dig into their pockets to pay off debt once the original borrowers are dead and gone.
It’s mortgage insurance that makes reverse mortgages about 30 percent more expensive than traditional loans, but it also provides borrowers with peace of mind.
“There are three things senior citizens are most concerned with,” Ogilby said. “They don’t ever want to be a burden to their children. They want to avoid leaving them with debt, and they want to make sure they can live relatively comfortably for the rest of their lives.”
The reverse mortgage helps in all three respects.
“If seniors can leave something to their heirs, that gives them a warm and fuzzy feeling,” Ogilby added. “But it’s not a primary objective, nor should it be.”
“Seniors who are sitting on hundreds of thousands of dollars in equity shouldn’t feel that they can’t afford prescription drugs or a trip to Europe.”
