A Way for Seniors to Tap Into Equity
Being house rich and cash poor didn’t bother Bill and Maggie Fletcher until 2001, when Maggie needed to buy a new car.
Reluctant to tap their modest retirement savings, the Dana Point retirees began to search for other options. That’s when Maggie discovered reverse mortgages -- loans that help older homeowners tap some of their equity without having to worry about repaying the money during their lifetimes.
“We are in a situation that millions of people are in,” Maggie said. “We were fortunate enough to buy a house at the right time, and it has tripled in price.” The reverse mortgage “allowed us to use some of the equity. We tap it whenever we have a special thing that we want to do.”
An increasing number of homeowners are doing the same thing. The number of reverse mortgages issued last year was 37,839, more than double the 18,097 such loans in 2003.
Though that’s not even 1% of the number of traditional mortgage loans written, it’s big news in an industry that was launched as a government “demonstration project” aimed at helping destitute homeowners eke out a little extra income in their old age.
Thanks to skyrocketing home values, homeowners of all income levels are taking advantage of reverse mortgage loans to supplement their retirement income, said Peter Bell, president of the National Reverse Mortgage Lenders Assn.
In a reverse mortgage, the lender pays the homeowner a lump sum or monthly payments -- the opposite of a traditional mortgage, in which the borrower pays the lender.
In return, the lender gets a lien on the home. When the homeowner dies, the loan can be repaid out of the proceeds of the home sale. Alternatively, homeowners can pay off the note if they sell the house and move.
Borrowers can still will their homes to their children or others; the heirs would be responsible for paying off the loan.
About 90% of reverse mortgage volume is insured by the Federal Housing Administration. Under the 1989 law that permitted the loans, the federal government can insure no more than 150,000 reverse mortgages annually. By midyear, the industry is likely to bump against that limit, Bell said.
Bell’s group is lobbying Congress to raise that cap. If Congress declines, he said, private lenders could pick up the slack, but at a higher cost to borrowers.
Reverse mortgages can be expensive and complicated enough that experts urge borrowers to seek independent counseling -- and discuss the loans with their heirs -- before signing on the dotted line, said Bronwyn Belling, reverse mortgage specialist with the AARP Foundation.
Here are answers to commonly asked questions:
Question: Who can get a reverse mortgage?
Answer: Homeowners who are age 62 and older. The average age of reverse mortgage borrowers is 74, according to the National Reverse Mortgage Lenders Assn.
Q: Can you get a reverse mortgage on a home that still has another mortgage on it?
A: Yes, but lenders generally require that the proceeds of the reverse mortgage be used to pay off any other mortgage debt before the consumer uses the loan for other purposes.
Q: How do the loans work?
A: That depends on the type of reverse mortgage that the borrower chooses. There are three options: a line of credit, a monthly payment or a lump sum.
With a line of credit, the bank provides the borrower with access to a set amount of money, but the borrower owes interest only on the amount that’s used. This is the type of loan the Fletchers chose. It allows them to handle one-time costs, such as Maggie’s car or vacations, and have money available for other needs that may arise.
The second option is what the loans were designed for -- to provide monthly income to seniors to help them make ends meet. With this option, the bank pays borrowers a set monthly amount for life.
The lump-sum option is most like a traditional mortgage. The borrower gets the full amount of the loan in a single payment. But the borrower makes no monthly payments. Instead, the interest that accrues is added to the loan balance. The principal and interest are paid only when the homeowner sells the home or dies.
Q: How much can you borrow?
A: The amount varies based on factors including the borrower’s age, the amount of equity in the house, the property’s location and the lender’s guidelines.
Homeowners in areas with high housing costs can borrow as much as $313,000 with an FHA-insured loan. In lower-cost areas, however, the maximum is $172,000.
Older people can borrow more on the theory that they have less time to live and the loan would be repaid more quickly.
For instance, a 74-year-old borrower in Los Angeles or New York who has $800,000 in home equity could get a lump sum of about $195,000 from the government-guaranteed Home Equity Conversion Mortgage program. Such a person living in Denver, however, could get only $164,000.
The 74-year-old in L.A. or New York with $800,000 in equity could get a bigger lump sum -- as much as $239,000 -- by borrowing from Financial Freedom, an Irvine-based lender that offers reverse mortgages not insured by the FHA.
Q: What if the borrower wants monthly payments instead of a lump sum?
A: With the government-guaranteed loan, the Los Angeles or New York borrower in the above example would be able to get $1,311 a month and the Denver borrower would get about $1,100 a month. (Financial Freedom doesn’t offer monthly payments.)
Q: What if you leave the home to heirs? Do they have to repay the loan right away?
A: No. When the homeowner dies, the heirs generally have up to a year to pay off the reverse mortgage. They can do that by selling the home or refinancing with a traditional mortgage. The reverse lender has no claim on any remaining equity in the home.
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Kathy M. Kristof welcomes comments but regrets that she cannot respond individually to letters or calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com.
