Running on Equity : Mortgages: Three types of reverse loans--tenure, term and line of credit--allow longtime homeowners to get cash out of their investment.


Nikki Grant has never been strapped for cash, even though she retired a decade ago.

The $900-a-month Social Security payments she collects after a career as a registered nurse--coupled with earnings from her modest investments--have allowed her to eat well, take some classes and enjoy an out-of-state trip now and then.

But until last year, the 78-year-old'sfinancial situation wasn't entirely comfortable, either.

Although Grant paid off the mortgage on her Long Beach home years ago, she didn't have enough money to travel as often as she'd like, help her kids and--in her own words--"do all the fun things that I've always wanted to do."

"I had all this equity tied up in my house, but I couldn't do anything with it," Grant said. "It was like having a bunch of money in the bank, but not being able to touch it."

All that changed last August, when Grant's daughter persuaded her to take out a reverse mortgage, a special type of loan for house-rich but cash-poor homeowners.

Grant opted for a "tenure" loan, one of the three basic types of reverse mortgages. Now she gets an extra $989 each month to supplement her retirement income, and the money won't have to be paid back until she either sells her home or dies.

She also has a $50,000 reserve account that she can tap at any time.

The money has allowed Grant to fix up her house, pay for an operation to improve her eyesight and buy gifts for her children and grandchildren. And next year she plans to take an around-the-world cruise on a luxury ocean liner.

"Everything is just wonderful now," she said. "I'm not just 'getting by' anymore--my reverse mortgage has given me a whole new life."

Relatively few older homeowners--between 10,000 and 20,000 across the nation--have taken out these offbeat loans. But that number is certain to grow: More lenders are getting into the business each year, and the federal government has launched a program aimed at making as many as 25,000 more reverse mortgages over the next few years.

Meantime, the stigma that was once attached to "remortgaging" a home is starting to disappear--and that too is boosting the popularity of reverse mortgages.

"Older people aren't as hung up on leaving their homes to their kids as they used to be, and that opens up the possibility of tapping their equity," said Jon Pynoos, a professor at USC's Andrus School of Gerontology.

"Even older people who are pretty comfortable are starting to look at their equity as a means of enjoying their life in retirement more. A reverse mortgage can let them do things that they otherwise couldn't do."

There are three basic types of reverse mortgages. The most common type is the "tenure" loan: It guarantees that you'll continue receiving a preset monthly stipend for as long as you live in the house. If you die, the money will be repaid by your estate.

A "term" loan, on the other hand, provides you with monthly stipends only for a specified period of time--usually between five and 12 years. When the term is up, the stipends stop and the money 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: You simply draw down the money whenever you need it.

Exactly how much you'll be able to borrow under any of the three plans will be determined primarily by your age, the value of your home and the amount of equity you have in it.

Your age is a factor because reverse-mortgage lenders use actuarial tables when setting their monthly stipends.

Statistics show that the typical American woman lives to about 79, while the typical male lives to about 72. So you would be entitled to a much higher monthly stipend at 70 than at 62.

"The formula is pretty simple: The older you are, the more money you can get each month," said Ken Schloen, president of the nonprofit National Center for Home Equity Conversion in Marshall, Minn.

'That's why reverse mortgages appeal most to people in their 70s or 80s instead of people in their 60s. A lot of people in their 60s look at how expensive these loans can be and the paltry stipends they'd get, and they just say, 'Forget about it.' "

The value of your house and the amount of equity you have in it are factors because your home will be used to collateralize the reverse-mortgage loan.

Understandably, a lender wouldn't want to take the chance of giving you, say, $200,000 over the life of the loan if your house is worth only $100,000.

Deciding which of the three types of loans to choose depends on a variety of factors. One key consideration is the length of time you plan to stay in the home. Another is the amount of money you want to receive each month.

"If you want to supplement your retirement income for as long as you stay in the house, you'll probably want to choose a tenure loan that guarantees monthly payments until you move out or die," said Bronwyn Belling, a housing expert at the American Assn. of Retired Persons.

If you eventually sell your house, Belling said, you can pay the loan off with the sale proceeds and use what's left of your profits to help make ends meet. If you die, the house will be sold and the loan paid off by your estate.

The monthly stipends you would get from a tenure loan would probably be lower than those you would get from a term loan. That's because a lender who makes a tenure loan is taking the risk that you might live well beyond the life expectancy figures in actuarial tables.

Conversely, a lender who makes a term loan knows exactly how much it will give you in the coming years and exactly when it'll get the money back. Since those two factors eliminate uncertainty, lenders can afford to increase the size of the monthly check you'll collect.

"As a general rule, people who want to get the highest stipend they possibly can usually choose a term loan instead of a tenure mortgage," Schloen said.

Term loans are often taken out by people who plan to move to a rest home or other type of retirement spot within a few years, Schloen said.

They're also popular with people in their 60s who need a little extra monthly cash while they wait for payments from a pension or annuity to kick in.

Perhaps the biggest danger posed by term loans is that your plans for the future could unexpectedly change.

For example, let's say you are 62. You take out a five-year term loan to get the highest monthly stipend you can get.

The short-term payback schedule doesn't bother you because you plan to move to another state to be closer to your sister by the time the term of the loan is up.

Unfortunately, your sister dies suddenly and you decide not to move. But when the loan comes due, you'll have to come up with tens of thousands of dollars to pay it off.

"It would be hard for you to get a new loan to repay your reverse mortgage because you're not working any more and would have a tough time proving (to a new lender) that you could pay the money back," said Belling at the AARP.

"Unless you've got some other assets you can sell to raise money, you might be forced to move."

You can avoid such a problem by taking out the third type of reverse mortgage--a line of credit that you can tap whenever you need some extra cash.

For example, you could draw $500 for several months in a row and then, say, draw down $10,000 in a lump sum if you suddenly needed a lot of money to pay a hospital bill or make home repairs.

"A line of credit provides you with more flexibility than any other kind of reverse mortgage," said Judith May of the Federal Housing Administration, the government agency that recently began a program aimed at making reverse-mortgage loans more widely available.

"The biggest danger is that if you don't have some discipline, you might use up your whole line of credit and wind up worse off than you are now."

If you need a relatively small monthly stipend--usually no more than $500 or so--it might be wise to consider a reverse-mortgage loan that's backed by the FHA. Dozens of lenders across the country are taking part in the FHA's program, which was launched about a year ago.

Borrowers under the FHA program can choose from a tenure, term or line-of-credit arrangement. Since the loans are insured by the government, lenders can usually keep their interest rates and setup fees a bit lower than those charged by non-FHA lenders.

The FHA program is attractive for a few other reasons.

First, you can "mix-and-match" the different loan types. For example, you could request $10,000 upfront to put on a new roof, future monthly stipends to supplement your retirement income and a line of credit that you could tap in case you run into unexpected expenses.

"Most non-FHA lenders don't offer that kind of flexibility," said Rose Hamilton, a lending expert with the U.S. Department of Housing and Urban Development, which runs the FHA.

In addition, under the FHA's term-loan program, you don't have to pay the money back as soon as the term of the loan is up. Your monthly stipends would stop but--unlike most non-FHA term loans--the money would have to be repaid only when you sell the home or die.

Perhaps the biggest drawback to FHA-backed reverse mortgages is that federal law prohibits the agency from insuring a loan of more than $124,950.

As a result, even if you had $1 million in equity in your house, you probably couldn't qualify for more than $600 or $700 in monthly stipends from an FHA lender unless you were very old and expected to die soon.

In addition, if you opted for an FHA-backed credit line and exhausted your full $124,950, you couldn't borrow any additional cash to meet emergency medical bills or other unexpected expenses.

"That $124,950 ceiling really limits the usefulness of the FHA program in most parts of California and other states where housing costs are high," Schloen said.

"If you've got a lot of equity and want to maximize your monthly stipends, you might have to skip the FHA program and use a non-FHA lender."

Once you've decided which type of loan you want, you'll probably have to make yet another decision:

Do you want to pick a fixed-rate loan for the security of knowing that your rate will never change? Or are you willing to take out an adjustable-rate mortgage with the hope of saving overall financing costs if rates decline?

"Our research has shown that most older people prefer fixed-rate loans," said William Texido of Providential Home Income Plan, one of California's biggest reverse-mortgage lenders. "The thought of having a floating rate scares them to death.

"When you see inflation killing you because you're living on a fixed income, the last thing you want to do is sign up for an ARM," Texido said.

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.

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.

HOW MUCH YOU CAN GET Maximum monthly loan advances on term reverse mortgages.

$100,000 Home ($80,000 Loan*)

Loan Term 5 Years 7 Years 9 Years 11 Years 10% interest 1,024 656 471 332 12% interest 969 606 410 291 14% interest 917 559 369 254

$120,000 Home ($96,000 Loan*)

Loan Term 5 Years 7 Years 9 Years 11 Years 10% interest 1,229 787 547 398 12% interest 1,163 727 492 349 14% interest 1,100 671 442 305

*Loan balance at end of term equals 80% of home value when loan is made.

SOURCE: "Home-Made Money," American Assn. of Retired Persons

REVERSE LOANS Increases in loan balances on a 10-year reverse mortgage assuming an advance of $300 monthly at a compound interest rate of 1% a month.

At End Total of Monthly Interest at Loan Balance of Year Loan Advances 1% Monthly (Amount Owed) 1 $3,600 $243 $3,843 2 7,200 973 8,173 3 10,800 2,252 13,352 4 14,400 4,150 18,550 5 18,000 6,746 24,746 6 21,600 10,127 31,727 7 25,200 14,394 39,594 8 28,800 19,658 48,458 9 32,400 26,046 58,446 10 36,000 33,702 69,702

SOURCE: "Home-Made Money"; American Assn. of Retired Persons

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