Reverse Mortgages Can Be a Blessing, but Not for Everyone
A few months ago Evelyn Judisch felt like she was headed for financial ruin. Judisch, 83, had amassed $15,000 in credit card bills for medication needed to keep her 94-year-old husband alive. “It got to the point where it was too much,” she recalled.
A home equity loan was out of the question for her and her husband--who has since died--because they had barely enough income to get by. Judisch, however, is now tapping into the equity she has developed in her Tarzana home through what’s known as a reverse mortgage.
Reverse mortgages--also known as home-equity conversion loans--allow seniors to tap into the equity in their homes and receive monthly checks, and/or lump sum payments they can use for anything: to pay for medication, get rid of credit card debt, fix up their home or just take a cruise. Most of these loans don’t have to be repaid until the senior passes away or moves out of the residence. There’s less left for the heirs, but the senior is able to live more comfortably.
Reverse mortgages have gained popularity in the past two or three years, but despite their potential benefits, these loans are not for everyone. Some lenders require that borrowers be at least 62 years old, although the average age of a borrower is 75. The fees on the loans can run up to $3,000, and some lenders require additional payments based on any growth in the value of the house after the loan was made. And, borrowers should review loan documents with an attorney or financial adviser.
Judisch got her reverse mortgage with Calabasas-based ARCS Mortgage Inc. The money is allowing her to pay off her costly credit card debt, put a new roof on the house and get several hundred dollars of income every month for as long as she stays in her home. While there won’t be much left for Judisch’s three grown sons, “they don’t really need anything from me,” she said. Her children, she said, favored doing whatever was necessary to keep her comfortable.
“Reverse-mortgage borrowers aren’t depleting their assets, they’re depleting their children’s assets,” explained Howard J. Levine, president and CEO at ARCS. “As long as they live in the house we’ll continue to make payments to them,” he said.
ARCS has been offering some form of reverse mortgage for three years, and now the lender is concentrating on loans backed by the Federal Housing Administration.
The FHA requires borrowers to be at least 62 years old. The amount they can pull out of their house in monthly payments, or in the form of a line of credit, depends on the value of their home and on their life expectancy based on insurance actuarial tables.
None of the mortgage interest on the loan is due until the death of the senior, when the senior voluntarily moves elsewhere or has to be moved into a nursing home. The FHA loans offered by ARCS have an adjustable-interest rate based on the one-year Treasury bill rate, plus 1.60%. There are also other expenses--such as upfront fees, and the requirement of mortgage insurance. There’s also an FHA loan limit of $151,725 to borrowers in Los Angeles County.
If all this sounds a bit complicated, it is.
Peter Mazonas, president and CEO of Transamerica HomeFirst in San Francisco, said that when his company makes a reverse mortgage it also requires borrowers to purchase an insurance annuity that guarantees the elderly borrower ongoing income starting at a certain age. This is pretty expensive. A typical annuity that would pay a 75-year-old woman $300 a month for the rest of her life starting at age 85 would now cost that 75-year-old a one-time fee of about $8,000 in cash.
Transamerica’s loan program--introduced in March--also has other expenses to consider. Up front, there’s the cost of an appraisal, home inspection and pest control report. There’s a loan fee of 1.5 points, or a minimum of $2,000. Closing costs are another $2,000. When the senior dies or moves to another residence, and the loan becomes due, there’s another 2% fee tacked onto the loan based on the market value of the property. In addition, Transamerica HomeFirst makes seniors pay 50% of any appreciation in the value of the home between the start of the loan and its maturity.
In Transamerica’s loan, the interest rate is fixed at 10.5% for monthly draws, and is 12.5% for money taken out from a separate reserve account.
Mazonas of Transamerica maintained that all the costs of his company’s reverse mortgage are really quite reasonable when compared to other companies that offer non-FHA reverse mortgages.
Bronwyn Belling, a housing specialist at the American Assn. of Retired Persons in Washington, D.C., warned, “It’s important to do your homework.” Last year, she said the AARP received 18,000 letters from seniors about reverse mortgages--more letters than the AARP received on any other issue.
Belling tells consumers to avoid loans that require repayment before death. However, she said, it’s commonplace for loans to require payment upon the voluntary move of a senior, or the permanent relocation to a nursing facility.
She suggests consumers avoid the few loans still offered that require repayment at the end of, say, 10 years. “But that type of loan is a dinosaur,” she said. Borrowers should also beware of any lender which requests the senior to sign over title to their property.
Finally, Belling said, “Often there is a quicker and cheaper solution to their money problems.” For example, California offers some seniors property-tax postponements, and various local and state housing finance agencies offer very attractive loans and grants to low-income seniors who need to fix up their homes.
More information about reversible mortgages is available through a number of resources. The AARP has a Home Equity Information Center which publish a list of lenders and a Home-Made Money consumers guide. These are available free by calling 202-434-3525 from 8 a.m. to 6 p.m., Eastern Standard Time.
The National Center for Home Equity Conversion offers a comprehensive book by Ken Scholen entitled “Retirement Income on the House.” This 340-page book costs $24.95 and is available by writing to the center at 7373 147th St. W., Suite 115, Apple Valley, Minn. 55124, or by calling 612-953-4474.
