Like millions of Americans, Bill and Helen Bluett's greatest financial asset is their home, a Spanish-style dwelling just a quarter of a mile from the ocean in San Clemente.
Selling the place and buying a cheaper one elsewhere could have brought the couple hundreds of thousands of dollars in extra money for their retirement years. But there was one problem with that idea.
"We love our home," said Bill Bluett, 67, a retired mechanical engineer. "We love our neighborhood. As long as we're physically able, we want to stay right where we are."
So this year, the Bluetts signed up for a reverse mortgage, a type of loan that allows older borrowers to tap their home equity without making payments as long as they live in the house.
With the money, the Bluetts are more than able to take on projects like remodeling the kitchen and bathrooms. More important, Bill Bluett said, the reverse mortgage makes them financially prepared for "any emergency -- whether it's medical or whatever -- that might come up" in the future.
"My wife and I decided it would give us a lot of peace of mind," he explained.
Reverse mortgages have been criticized for high upfront costs. Lenders may charge 2% of the loan amount in origination fees -- as much as $7,256 in California -- and most borrowers also pay 2% for mortgage insurance, along with other fees that can far exceed those in conventional home loans.
Loan amounts are often subject to strict limits, and many financial planners are still not familiar enough with reverse mortgages to guide their clients.
But in an era when legions of older homeowners are sitting on vast amounts of untapped equity, reverse mortgages seem to be catching on. Competition has started to push down costs, and lenders are beginning to offer loans on unlimited amounts, a noteworthy shift in an industry that has mostly relied on federally insured mortgages with strict caps.
In recent months, Countrywide Financial Corp., Bank of America Corp. and BNY Mortgage Co. all have scaled up their efforts in the growing field.
After years on the sidelines, Wall Street has entered the game, with investment banks for the first time purchasing such loans in a "secondary market" that may further stir innovation and encourage more lenders to offer reverse mortgages. At the current rate, lenders could sell more than 100,000 reverse mortgages this year -- more than double the number from 2005.
"The significant thing in the last several months is that the big boys are coming in," said Bart Johnson, president of Irvine-based Financial Freedom Senior Funding Corp., a leading provider of reverse mortgages. He added, "The last six months to a year have been incredible."
Just last week Housing and Urban Development Secretary Alphonso Jackson described reverse mortgages as "the bright spot in today's housing market," adding that "their significance will only increase as more baby boomers reach retirement."
In a conventional mortgage, the lender lends you money to buy a house and you gradually pay down the debt -- and build up equity -- as you make monthly payments.
In a reverse mortgage, the lender gives you the money -- as a lump sum, in monthly installments or as a line of credit -- and takes your home equity as payment.
Typically, reverse mortgages don't have to be paid back until you sell your home, move or die. People must be at least 62 to qualify for a reverse mortgage. In California, borrowers must receive counseling on the implications of these loans (which is also required for all federally insured reverse mortgages).
As with all loans, reverse mortgages have fees and charge interest. For example, a 78-year-old borrower whose home is worth $200,000 might end up with a reverse mortgage of $123,000, based on his age, interest rate levels and other factors. In this case, the borrower might pay about $13,000 in upfront fees -- including a $4,000 loan origination fee, $4,000 in mortgage insurance and a $4,000 "set-aside" to cover servicing costs for the life of the loan, according to Fannie Mae, the federally chartered lender.
Based on recent interest rates, such a loan might come with an adjustable interest rate of about 6%, with interest charges compounding during the life of the mortgage.
Given that, homeowners should carefully weigh their options, experts say.
Home equity loans can be a cheaper way to come up with cash for people willing and able to make payments in retirement. Selling the house and downsizing to a cheaper dwelling is another alternative, depending on the borrower's priorities.
If the goal is simply home repair, seniors should explore whether their communities have low-cost loans available for that very purpose, said John Rother, director of policy and strategy for AARP.
"It's good to have the option," Rother said of reverse mortgages. "But it's not an option appropriate for everyone."
But for people who are long on home equity and short on cash, the reverse mortgage offers a key advantage: Borrowers don't have to pay back the loan as long as they stay in the house. Indeed, a reverse mortgage may be the only way that some people can afford to stay in their own home.
"People who are using them, by and large, have a huge degree of satisfaction," said Peter H. Bell, president of the National Reverse Mortgage Lenders Assn., whose membership has more than doubled over the last few years to 540 firms. "For a senior with a fixed income, taking on a loan with monthly payments doesn't make a lot of sense."
Most reverse mortgages are insured by the Federal Housing Administration, but loans insured by the agency are capped at $362,790 in higher-cost regions such as Southern California. In lower-cost areas, the cap is as low as $200,160.
In some cases, older borrowers seek reverse mortgages to gird for future medical bills. Malcolm Greenhill, a financial planner in San Francisco, recalled a 72-year-old client with emphysema who feared his health would decline further but lacked the income to pay for in-home care. The man's home was worth $1.2 million.
"I put his mind at rest and said there's a way here that you can tap into your equity," Greenhill said. "A reverse mortgage would be a good option for somebody like that."
Others enjoy good health and view their home equity as an asset that should enhance their later years. They are people like Diana Stuart, 88, who has lived for more than three decades in a four-bedroom home in Huntington Beach that she bought for $30,000.
Stuart remains active, traveling overseas and managing properties in Orange County. She also gives to charity, including missionary efforts abroad.
"I was sitting in a house that's worth about $850,000, free and clear," she said of her decision to take out a reverse mortgage. "I've got no heirs. What am I wasting all that money for nothing?"
"If anything happens, and I have to go to a 'home' or something like that, at that time the house would be sold, and we'd pay off the balance. It's such a simple thing."
Increasingly, big lenders are stepping up efforts to market the loans and starting to offer some breaks in their cost. They are motivated in part by the high level of homeownership among older people. And they are aware of the aging of the baby boom generation, whose oldest members are now 61 and who will be making big-ticket retirement decisions in the coming years.
Early this year, Countrywide Financial of Calabasas, the nation's biggest mortgage lender, introduced SimpleEquity, its reverse mortgage that imposes no caps, waives the origination fee for certain borrowers and charges no premium for mortgage insurance.
In April, Bank of America announced that it would buy Seattle Mortgage Co., one of the leading reverse-mortgage providers in the country, and in May, BNY Mortgage of New York unveiled the first fixed-rate reverse mortgage for jumbo home loans, filling one of the gaps in the industry.
By some indications, new offerings are filling a gap in the market. Countrywide's SimpleEquity, which is granted for amounts far above the federal lending limit, now accounts for almost half the lender's reverse mortgages. Such innovations "are opening up doors that didn't exist in the past," said D. Steve Boland, managing director of reverse mortgages at Countrywide.
He added, "It's a very natural part of the evolution of homeownership to make mortgages that will enable people to stay in their homes."
As some see it, reverse mortgages -- in new variations -- are destined to become increasingly popular as 76 million baby boomers head into old age. Boomers may prove much more comfortable with accepting debt in old age than today's seniors. Beyond that, many could face financial hardship because of a squeeze on pension benefits and increases in healthcare costs.
"In the future we'll see new vehicles, new pricing, new ways of pulling out just the amount of money that you need," predicted Michael Boone, a financial planner in Bellevue, Wash. "I fully expect a reverse mortgage to be as normal as a 30-year fixed."
At Financial Freedom, Johnson envisions a future in which reverse mortgages may be seamlessly linked with the conventional variety.
Such a loan might start off as a traditional mortgage. But years later, when the note is finally paid off, nobody burns it or throws it out: Instead, the mortgage automatically moves into reverse, as the borrower -- older now -- takes out cash for retirement and allows some of the equity to flow back to the lender.
"I think that's going to become a pretty mainstream product," Johnson predicted. "Today it doesn't even exist."
(BEGIN TEXT OF INFOBOX)
Reverse mortgage Q&A;
Some points to consider:
What is a reverse mortgage?
A reverse mortgage allows people to borrow against the equity in their home, taking the money in monthly payments, as a lump sum or as a line of credit.
Do I qualify?
If you are at least 62, own your home and are not delinquent on any federal loans, you qualify. If the reverse mortgage enables you to pay off the remainder of your conventional mortgage, you also would qualify.
Does it make sense for me?
Are you able and willing to make payments on a conventional loan that may be cheaper? Are you willing to sell your house to capture some of your home equity? Do you have enough income to cover your living costs? If you answered no to any of these questions, a reverse mortgage might fit into your plans.
What are the alternatives?
A big alternative is to sell your home and move somewhere cheaper. To consider this option, you would explore what your home is worth, what it might cost to buy or rent another one, perhaps in another city, and what kind of financial returns you could rely on if you had money left over after those transactions. Beyond that, other kinds of loans may cost less than a reverse mortgage, but they require monthly payments.
Where can I get more information?
AARP offers information at www.aarp.org/money/revmort. The site includes a reverse mortgage calculator that may provide an idea of how much money you would qualify to borrow, based on your age and the appraised value of your house.
Source: Times research