On the House : With a reverse mortgage, older homeowners can turn a lifetime of loan payments into tax-free income.
Glen Akins and his wife, Alice, have traveled all over the world since they retired in the late 1970s, visiting some 30 countries.
But their trips over the past few years have been especially enjoyable. They were on the house, literally--paid for by a reverse mortgage on their Hollywood Hills home of 44 years.
“I read about reverse mortgages in The Times,” said Glen Akins, 82, “and it seemed like a good deal for us.
“Financially, we had declared a moratorium on travel and other expenses. The main problem was our pensions; we don’t get increases every year like we used to.
“We looked into all the plans over a period of a year,” Akins said, and in 1995 the Akinses decided to put their 1950s two-bedroom, two-bathroom house to work.
Through Irvine-based Financial Freedom Senior Funding Corp., the couple took out a reverse mortgage that gives them a tax-free payment every month.
“It’s a wonderful feeling,” said Alice Akins, 76. “If we see something we want, or someplace we want to go, we can. It’s great to be free to
Glen Akins retired in 1977 after 27 years as ABC’s top engineer; Alice worked for ABC as a literary rights editor for 15 years. She left in 1959 to return to school for a master’s degree and a second career of teaching in East Los Angeles. She retired from teaching in 1973.
“I was concerned about Alice,” Glen Akins said. “My ABC pension stops if I die first. But now, Alice will be able to stay in our home.”
For homeowners 62 or older who could use additional income, reverse mortgages can be worth learning more about.
A reverse mortgage is the opposite of the traditional declining balance-growing equity home loan that requires the borrower to pay monthly payments to the lender.
Sometimes called a reverse annuity mortgage, a reverse mortgage is an increasing balance-declining equity home loan that pays the homeowner tax-free income.
A reverse mortgage requires no monthly payments. Instead, the lender pays the homeowner.
A reverse mortgage is a “non-recourse loan” secured by the borrower’s principal residence. Even if the homeowner lives to be 120, the reverse mortgage lender cannot demand repayment until the borrower either permanently moves out of the residence, sells it or dies.
Only the residence is the loan security; the borrower’s other assets never become liable for repayment.
How much cash the senior homeowner can receive from a reverse mortgage depends on several factors:
* The home’s market value.
* The borrower’s age.
* The interest rate.
* The lender’s maximum reverse mortgage.
The borrower’s income and credit are irrelevant.
As a general guideline, reverse mortgage institutions lend between one-third and one-half of your home equity.
Because reverse mortgages must be a first lien on the residence, any existing mortgage balance must be paid off with a lump sum advance from the new reverse mortgage. If the existing mortgage is too large, a reverse mortgage isn’t feasible.
There are three major reverse mortgage lenders:
* FHA has made more than 32,000 home equity conversion mortgages since 1989. These loans have a maximum amount of $208,800 in high-cost urban areas.
* Fannie Mae offers a “homekeeper” reverse mortgage with a limit of up to $240,000.
FHA and Fannie Mae reverse mortgages are available in all states except Texas, where state law bars reverse mortgages.
* Financial Freedom Plan ( 500-5150) originates reverse mortgages of up to $700,000 in Arizona, California, Colorado and Washington.
Fannie Mae also offers reverse mortgages for senior citizens who wish to purchase homes without monthly mortgage payments.
For example, in 1997 Fred and Marion Vallier, then ages 89 and 86, of Ames, Iowa, obtained the first Fannie Mae reverse mortgage for home purchase. They bought their new $154,000 home with the help of a $93,000 Fannie Mae homekeeper reverse mortgage. It requires no monthly payments, and the balance of the purchase price came from the sale of their previous home.
FHA and Fannie Mae reverse mortgages are originated by local and national mortgage brokers and mortgage bankers.
Norwest Mortgage, with more than 750 branches, claims to be the largest originator of reverse mortgages. However, not all Norwest branches handle reverse mortgages.
General Motors Acceptance Corp. is another major nationwide originator of reverse mortgages.
Financial Freedom Plan originates its own reverse mortgages, as well as FHA and Fannie Mae reverse mortgages, through its Arizona, California, Colorado and Washington offices.
Names of local Fannie Mae reverse mortgage lenders are available by phoning (800) 7-FANNIE. Most of these lenders also originate FHA reverse mortgages.
Reverse mortgages are designed for “house-rich but cash-poor” homeowners.
If you are a qualified senior citizen with no mortgage or a small mortgage balance who could use monthly, tax-free lifetime income and/or a credit line or lump sum, a reverse mortgage can be ideal.
However, reverse mortgages reduce borrowers’ home equity. Also, because of upfront loan fees, if you don’t plan to stay in the home at least five years, a reverse mortgage can be very costly on an annual percentage basis.
If you receive Supplemental Security Income or Medicaid and you don’t spend your reverse mortgage advances by the end of each month, your benefits can be reduced. But Social Security and Medicare payments are not affected by reverse mortgages.
Reverse mortgage lenders must provide borrowers with total annual loan cost calculations showing the average annual interest rate for the first two years, at the borrower’s life expectancy age and at 40% beyond the borrower’s life expectancy age.
The longer the borrower remains in the home, the lower the loan’s cost.
More details are provided in Bruss’ special report, “How Senior Citizen Homeowners Can Receive Tax-Free Lifetime Reverse Mortgage Income,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010. Credit card orders are welcome at (800) 736-1736.