Not too long ago, life in retirement for Westchester residents Harry and Roxie Blocher just wasn't everything that they had hoped it would be.
Harry Blocher, 77, said they were "barely getting by" on their monthly Social Security checks and a modest pension that he had earned as an electronics engineer with ITT.
Their bills were mounting, their roof needed repairs and their 1977 Datsun "was hardly making it from one place to the next."
Then, last year, the Blochers decided to respond to advertisements for "reverse mortgages"--a relatively new type of loan that usually doesn't have to be repaid until the borrower sells the home or dies.
After comparing various plans, the Blochers chose a reverse-mortgage lender that provided them with enough cash to buy a new car and take a monthlong vacation to Canada.
Under terms of the loan, they also get $498 a month to help meet their expenses--and they won't have to pay back a nickel for as long as they live.
"The money has made a big difference in our lives," Harry Blocher said. "We've been able to restore the standard of living that we lost when I quit working."
Thousands of older Americans like the Blochers are discovering the advantages of reverse mortgages, which are designed especially for house-rich but cash-poor elderly homeowners.
But at the same time, some experts worry that many borrowers might not realize just how expensive the loans can be. And as more reverse-mortgage lenders get into the business, there is concern that fly-by-night operators will take advantage of gullible older people.
"We're sailing into uncharted waters with these loans," said Bronwyn Belling, a housing expert with the American Assn. of Retired Persons. "Reverse mortgages can be a real godsend for some older people, but they're terrible for others.
"The problem is, there's just no hard-and-fast rule that says who should get one and who shouldn't. Everybody's case is different."
Reverse mortgages got their name because they're essentially home loans that work backward.
Rather than a lump sum that must be repaid in monthly installments, the money is advanced in monthly increments of $200, $500 or even more than $1,000--depending on the homeowner's age, cash-flow needs and equity in the house.
Many reverse-mortgage plans will also allow the borrower to get several thousand dollars up front to pay pressing bills or meet other expenses.
Significantly for the cash-strapped homeowner, the money usually doesn't have to be paid back until the term of the loan expires or the borrower sells the house and moves out. If the homeowner dies, the money is repaid by the estate.
An estimated 10,000 to 20,000 reverse-mortgage loans have been made in the United States. More than 20 banks and insurance companies offer reverse mortgages across the country. About half a dozen are active in California.
Some nonprofit groups and cities also offer the offbeat loans, and legislators in Sacramento are working on a bill that would create a special program backed by the state.
Even Uncle Sam has gotten into the act: The Federal Housing Administration launched a program last year to insure as many as 25,000 new reverse mortgages, more than doubling the number of loans in force today.
Not everyone qualifies for a reverse mortgage.
Most lenders won't make the loans to people under the age of 62. They also usually require that the home be paid off or that the loan balance be no more than 10% of the property's appraised value.
Reverse mortgages can be expensive, too. Interest rates are usually at least a point or two higher than rates on conventional loans, in part because the lender typically won't be repaid a dime until the term of the loan is up.
And while some lenders simply charge interest on their monthly advances, others charge interest and demand to share in the home's future appreciation.
"Studies show that nearly 90% of all homeowners want to stay in their home for as long as they're physically and financially able to," said William J. Texido, whose San Francisco-based Providential Home Income Plan is one of California's biggest reverse-mortgage lenders.
"We can't do much about their physical condition, but we can certainly help them on the financial side. A reverse mortgage gives people the chance to 'age in place.' "
People take out reverse mortgages for a variety of reasons. Some want to replace a deceased spouse's Social Security checks or pension payments. Others need some cash because their savings have been drained by medical bills or other large expenses.
Still others take out the loans "because they have more desire than need," said Texido, whose firm has made about 1,000 loans in California. "They want to take some trips, buy a nicer car, help their grandkids out financially or do something else fun with the money."
There are three basic types of reverse loans. The most common is the "tenure" mortgage, which guarantees the borrowers a fixed monthly stipend for as long as they live in the house. If two married borrowers die before the home is sold, the money must be repaid by their estate.
A "term" reverse mortgage provides monthly stipends only for a specified period of time, usually between five and 12 years. When the term of the loan is up, the stipends must usually be repaid--along with the interest that has accrued--in a lump sum.
The third type of reverse mortgage basically works like a line of credit: The borrower simply draws down the money whenever it's needed.
Perhaps the biggest drawback to reverse mortgages is their expense. For example, Capital Holding Corp.--one of the nation's largest reverse-mortgage lenders--charges an up-front fee of $3,000 plus 7% of the appraised value of the home just to set up a loan.
So if a widower who owned a median-priced Los Angeles home of $200,000 wanted to take out a reverse mortgage, he'd have to pay nearly $14,000 in set-up charges--not to mention a 10% interest rate that would compound on his monthly stipends until the loan was repaid.
Although Providential's setup charges are less--$750 plus a sum equal to 1% of the home's appraised value--it also typically commands a share of the property's future appreciation.
Reverse-mortgage lenders defend the cost of their programs by pointing out that the loans are unusually risky.
If a homeowner lives longer than expected, the institution might actually lose money because it would pay out more in monthly stipends than it would get back when the house is eventually sold.
Still, even many lenders admit that the high cost of setting up the loans scares off many borrowers who won't be living in their house for long.
"It wouldn't make sense to pay thousands of dollars up front if you're going to move out in a year or two," said Ray McEneaney, an official at Capital Holding.
The mortgages are also unattractive to older people hoping to leave an estate that's as large as possible for their children or other heirs.
"I checked out a bunch of different programs and they were all rip-offs," said Lynn Smilay, a 63-year-old who lives with her husband in Sherman Oaks.
"We looked over all the paper work that the companies sent us and I said, 'My gosh, by the time we die and the bank gets paid off, there'll be nothing left for our heirs.' "
Although it's admirable that most older people want to leave a large estate for their children, some say that seniors should be looking out for themselves first.
"It's a noble gesture, but I don't think that it's such a good idea," said Lawrence A. Krause, president of the San Francisco-based financial planning firm that bears his name. "You should live life in retirement to the fullest, and a reverse mortgage can help you do that.
"If knowing that you'll leave a big estate for your kids will bring you more happiness than anything else in the world could, then fine--don't touch your equity. But if taking out a reverse mortgage is the only way you'll be able to do all the things you've always wanted to do, I think you should go ahead and get one."
Krause, however, urges would-be borrowers to consider all their other sources of funds before they take out a reverse mortgage.
For example, borrowers who have lots of equity in their home might be able to simply refinance with a less-expensive conventional loan and draw out some cash, reducing their up-front costs and saving on their overall finance charges.
But unlike reverse mortgages, conventional loans require borrowers to begin paying the money back immediately--a difficult task for older people who are living on a fixed income.
Stocks, bonds or mutual-fund shares can be cashed in to pay expenses. Jewelry, furs, antiques or other valuables can be sold to raise money.
"A lot of older people also have life-insurance policies or annuities that they can cash in or borrow against," said Jack Blankinship, a partner in the Del Mar-based financial planning firm of Blankinship & Foster. The caveat: A couple could eventually wind up in even worse financial shape if they cash in their policies and use up all the money before they die.
Many states and municipalities also run programs designed to help older people.
"If you just need some money for home improvements, you might be able to get a low-rate loan or some other assistance from your state or local government," said AARP's Belling.
California and many other states also have programs that allow older homeowners to defer their annual property taxes until they sell their home or die, if certain conditions are met.
Another alternative is a sale/leaseback. In the typical arrangement, an elderly couple could sell their home to their son and simultaneously sign a lease with him that allows them to rent the house for as long as they wish.
The son would make a down payment and then get a bank loan to finance the rest of the purchase.
The parents could live off their resale profits and may even be eligible for the one-time exclusion that lets them keep up to $125,000 of the sale proceeds tax-free. They would also have the comfort of knowing that they could live in their house for as long as they wish.
The son, meantime, would collect monthly rent payments and be eligible for the tax deductions that all landlords enjoy. He could also rent the house or sell it for a profit when his parents move out or die.
Housing expert Belling notes that sale/leasebacks entail some important tax and legal issues. So, she advises older people who are considering such a transaction to first get the advice of a tax expert and lawyer.
Borrowers who have weighed all their alternatives and decide that taking out a reverse mortgage is a good idea still have plenty of work to do. They've got to decide which type of loan to select, and then do lots of "comparison shopping" among lenders.
State's Reverse-Mortgage Lenders Here is a list of some of the largest reverse-mortgage lenders in California. Some offer the products statewide, while others work only in specified areas. A few tend to move in and out of the business frequently, based on their cash reserves and other factors.
* American Homestead Mortgage Corp., 305 Fellowship Road, Mt. Laurel, N.J. 08054. It quit taking loan applications in California in January, but plans to resume operations later this year.
* Bank of Lodi, Callbox 3009, Lodi, Calif. 95241; (209) 367-2000. Lends only to borrowers within 50 miles of Lodi.
* California Financial Express, 971 E. Green St., Pasadena, Calif. 91101; (818) 577-0233. Active in Southland only.
* Capital Holding Corp., Home Income Security Plan, P.O. Box 32830, Louisville, Ky. 40232; (800) 431-8100 or outside California, (800) 962-6550. Active throughout California and in most other states.
* First California Mortgage, Home-Equity Conversion Department, P.O. Box 750939, Petaluma, Calif. 94975; (707) 792-5400. Makes loans across the state.
* Life Services Inc., 1025 N. Brand Blvd., Suite 320, Glendale, Calif. 91202; (818) 547-0585. Loans in Southland only.
* Provident Central Credit Union, 1825 Magnolia Ave., Burlingame, Calif. 94010; (800) 632-4600. Offers loans to all its 100,000 members across the state.
* Providential Home Income Plan, 3 Embarcadero Center, Suite 2350, San Francisco, Calif. 94111; (800) 441-4428. Active throughout the state.
Reading Up on Reverse Mortgages Here are some of the primary sources for more information about reverse-mortgage loans:
* American Assn. of Retired Persons. The nonprofit group provides several useful pamphlets and books, including its comprehensive "Home-Made Money: A Consumer's Guide to Home Equity Conversion" and a list of reverse-mortgage lenders across the nation.
For a free copy of either publication, send the request on a post card to AARP Home-Equity Information Center, P.O. Box 2400, Long Beach, Calif. 90801-2400. Delivery takes about three weeks.
* Independent Living Resource Center. This nonprofit group also publishes a list of reverse-mortgage lenders and a brief description of alternatives. But unlike the AARP, the center focuses only on California--which means its list tends to be more up-to-date than those offered by other agencies.
The free list can be obtained by writing to the group at 70 10th St., San Francisco, Calif. 94103. Requests must be accompanied by $1 and a self-addressed, stamped envelope.
* Life Services Inc. The company, which essentially makes reverse mortgages on behalf of a consortium of lenders, offers several free brochures.
The agency also provides counseling and assistance to elderly Southland residents. Initial consultations to discuss its reverse-mortgage loans are free, but there's a fee charged to people who go on to use the program.
Life Services is headquartered at 1025 N. Brand Blvd., Suite 320, Glendale, Calif. 91202. Its phone number is (818) 547-0585.
* National Center for Home Equity Conversion. Its free list contains names and addresses of reverse-mortgage lenders across the country and can be obtained by sending a self-addressed, stamped envelope to the group's headquarters, 348 W. Main St., Marshall, Minn. 56358.
The center also publishes a highly regarded guide to sale/leasebacks, which are often a less expensive proposition than taking out a reverse mortgage. The guide, which includes a model contract that can be used to fashion a sale/leaseback of your own, costs $45. Next week: How to pick the type of reverse mortgage that's best for you.