Mortgages That Can Pay You Monthly Income
A growing number of senior citizens--seeking ways to cope with declining returns on their savings and rising living expenses--have turned to reverse mortgages in recent years.
These loans, which can pay you monthly income for life, are a way of tapping home equity without having to move. And as increasing numbers of Americans find themselves alive and healthy long after their retirement funds are exhausted, reverse mortgages seem destined to swell even more.
In just the first eight months of 1992, the American Assn. of Retired Persons received about 16,000 requests for information about reverse mortgages, compared to 14,000 such requests in all of 1991, said Bronwyn Belling, an AARP housing specialist. In the last three years, the number of reverse mortgages actually written has more than tripled, added Ken Schoen, director of the National Center for Home Equity Conversion.
Yet even the biggest advocates of reverse mortgages note that they can have serious drawbacks, ranging from high fees and expenses to the possibility that seniors who take out certain “term” loans may still be forced to move.
In addition, the loans remain inaccessible in many parts of the country. There are no reverse mortgage lenders in Arkansas, Louisiana, Mississippi, Oklahoma, North Dakota, South Dakota, Tennessee, Texas, West Virginia or Wisconsin, according to AARP. And several other states have only one bank, thrift or finance company willing to make the loans.
The product, a hybrid created in the early 1980s, is also frequently misunderstood. Reverse mortgages work just like a regular mortgage. But instead of getting a lump sum that you must immediately start paying off, you usually get monthly payments that needn’t be repaid until the end of the loan term. Principal and interest charges simply accumulate until the loan is due. Often repayment is triggered only at the borrower’s death, and paid for by the borrower’s estate.
Reverse mortgages are generally available only to those over the age of 62, but they are not federally subsidized loans with below-market rates and terms, said Judy Gaither, housing director at the Human Investment Project in San Mateo. Indeed, they frequently cost significantly more than regular mortgages. Seniors need to shop carefully to avoid fees and charges that can often add up to tens of thousands of dollars.
Nonetheless, for cash-poor, home equity-rich seniors, reverse mortgages can be a key to a more comfortable retirement.
They come in three varieties: There’s a tenure loan, which works like an annuity, paying you a set amount each month for as long as you live in the house. There’s a line of credit, which works somewhat like a credit card. You have a set amount available that you can use at any time. But once you hit the limit, you’re out of cash. And there’s a term loan, which pays you a fixed amount for a set period of time. The shorter the time frame, the more you get monthly.
Some reverse mortgages are federally insured; others are privately insured, and others are not insured at all. You pay a premium for the insurance coverage. But the cost may be worthwhile, if you want to make sure your bank will always be able to pay on a tenure reverse mortgage.
How much can you get? That depends on how much the house is worth, the kind of loan you choose, the interest rate and your age.
Since the loan is secured by the equity in your home, the more equity you have, the higher your potential loan amount. But lenders will usually lend only up to 80% of the home’s value. There’s another caveat too. If you want a federally insured reverse mortgage, you usually can’t get more than about $125,000 because of FHA loan limits.
Tenure loans pay significantly less monthly than term loans. But if you live longer than anticipated, the tenure loan will pay you more over time. Not surprisingly, an 85-year-old will get bigger payments on a tenure loan than a 75-year-old. And, finally, the lower the interest rate and fees, the more money you get each month.
For example, a 70-year-old woman with a $100,000 home could get $340 per month with a 10% tenure loan. But if she waited to borrow until she turned 80, she’d get $585 monthly. If she chose a five-year term loan instead, she’d get $1,024 a month. But if her interest rate rose to 14%, monthly payments on the five-year term loan would fall to $917.
