Reverse Loans Liberate Seniors

Sprightly homeowners in their late 70s--Isabell Moore of Portland, Ore., and Wilbur and Anne Henry of Bethesda, Md.--have a blunt message about home equity for their fellow seniors across the country:

Don’t just sit on that equity, use it! Have fun. Travel.

Don’t deny yourself pleasures because you want to “save” all your equity to pass on to your kids or heirs.

Moore and the Henrys are at the vanguard of an important generational change underway among American seniors. They own comfortable, well-kept homes in prosperous neighborhoods. They have been retired for more than a decade and gradually discovered that their fixed incomes aren’t quite enough to keep up with the rising cost of living.

Equally important, they found themselves feeling hemmed in financially. They had almost enough monthly income to handle regular bills, but nothing to spend on the fun things that enrich one’s retirement years.

Seeing the World,

Beautifying the House

“[Anne and I] got to the point,” Henry said, “where we felt we couldn’t even travel to visit our grandchild (in Illinois). We were strapped and going nowhere.”

The Henrys solved their cash-flow problem in a way that growing numbers of seniors are becoming more willing to try: They put a reverse mortgage on their home, pulled out a chunk of cash immediately and are receiving monthly checks from their lender.

Since taking out the mortgage, they’ve financed some long-postponed home repairs, plus they’ve traveled to Italy, Spain, England, Portugal, Morocco and Mexico.

Moore hasn’t used her money to travel the globe. Instead, she’s created a miniature world of her own in her yard, with a pond, sprinkler system, lush garden plantings and flowers that bring her what she describes as “just enormous enjoyment--it’s my little paradise.”

“I thought I could live on my Social Security,” she said, “but you know, that’s a very difficult thing to do these days.” When she heard about the concept of mortgaging her debt-free home, “at first it didn’t feel right.” What about her nephews and nieces to whom she’d always planned to leave the house? What about the golden rule of her Depression-survivor generation: Avoid debt at all costs?

Heirs Wanted Her

to Be Happy

But her prospective heirs told her to “enjoy yourself, don’t worry about us.” And “they were right,” Moore said. “For most [seniors], the [heirs] they’re worried about probably have more money than they do anyway. They’ll do fine.”

The tool that Moore and the Henrys used is one of the least-understood forms of financial engineering of the last 30 years. As the name suggests, reverse mortgages work backward: Rather than the borrower sending money to the lender, the lender sends money to the borrower.

Though the idea of converting illiquid equity into cash has been around for decades, the concept took its first big leaps in the United States during the 1990s, when the Federal Housing Administration and Fannie Mae began offering loan programs. Currently, about 10,000 seniors a year take out reverse mortgages--far fewer than the estimated hundreds of thousands who are eligible and could benefit.

Reverse mortgages are restricted to homeowners 62 years or older, and can provide custom-crafted mixes of lump-sum payments at closing, credit lines for unexpected expenses and regular monthly checks.

The payout amounts vary according to age and net home equity. Though once used primarily by seniors facing financial emergencies, more and more middle- and upper-middle strata homeowners--like the Henrys and Moore--are using them to enhance their quality of life.

Yet many seniors and their relatives remain suspicious of reverse mortgages.

Liz Scholz, a Fannie Mae expert on the subject, said that some families still believe that “the lender is going to take Mom’s home from her” if she signs up for a reverse mortgage and lives for a long time.

But that’s never the case. All commercially available reverse mortgages on the market require no repayments to the lender until the senior sells the house or dies. Then the total of all payouts, plus accrued interest, is subtracted from the sale proceeds and sent to the lender. The rest of the money goes to the estate of the deceased homeowner, like any other asset.

Consumer-Protection

Features a Plus

Reverse mortgages carry consumer-protection features far beyond those of regular mortgages. Thanks to oversight by the American Assn. of Retired Persons and the National Center for Home Equity Conversion, all reverse mortgages come with hands-on counseling assistance unheard of anywhere else in mortgage lending.

Often the loan officers form lasting personal ties with the elderly borrowers they help. Both the Henrys and Moore stay in regular touch with their loan officers.

“We have a friend,” Wilbur Henry said, “not just a lender.” How often do borrowers get to say that?

Distributed by the Washington Post Writers Group.

For More Information

For information on reverse mortgages, contact AARP at (202) 434-6042, or the National Center for Home Equity Conversion Web site, https://www.reverse.org.