Imagine a scenario in which, instead of struggling to come up with the money for a mortgage payment that's resetting to a higher level, you could tap the unused equity in your home not only to pay off that loan but also to have money for living expenses, remodeling, traveling or even investing in a vacation home. For seniors, there is such an option: the reverse mortgage.
And that's exactly what 73-year-old Betty Jenkins chose after being laid off from her job with a health maintenance organization. Unable to afford the $1,500 monthly payment on the Chatsworth home she bought in 1988 after a divorce, Jenkins signed up for a reverse mortgage through Financial Freedom, a unit of IndyMac Bank and the nation's largest provider of such loans. Not only did she keep her home and retire her existing mortgage, but she also was able to remodel her kitchen, pay her property taxes and insurance, maintain her car and keep her two dogs enjoying the lifestyle to which they'd become accustomed.
"It seemed too good to be true," said Jenkins, who shares her home with companion Eddie Applegate, 72. But after talking with the Federal Housing Administration and the Department of Housing and Urban Development, the couple found out it was for real. "We would not have to pay loan payments ever again." That's because this type of loan truly does work in reverse: Instead of the homeowner paying the lender each month, the lender gives the owner money upfront and takes the existing home equity as collateral.
Fortunately for the couple, with less than a $200,000 balance on the existing mortgage and a home worth close to $500,000, the remaining equity was more than enough to also provide for a modest $25,000 credit line, which can, depending on home values and interest rates, be reduced or increased throughout the life of the loan.
Such flexibility is one big reason why reverse mortgages have grown extremely popular. Of the 345,762 reverse loans insured to date by the FHA, nearly one-third were made in 2007, according to the AARP Public Policy Institute and HUD, and 27% of those were in California.
With traditional home equity credit lines increasingly difficult to get in a time of declining home values and tight underwriting standards, eligible seniors older than 62 are finding that one benefit of reverse mortgages -- other than no pre-payment penalties and no credit or income qualifications -- is the ability to get rid of the sub-prime and other adjustable loans facing payment increases.
Reverse mortgages are also gaining popularity in upscale areas such as Newport Beach, where $2-million homes are commonplace, said Wells Fargo loan agent Alyson Lloyd. Unable to qualify for traditional home equity loans because of low credit scores but wanting to remain in place for a long time, some house-rich but cash-poor borrowers are now able to tap equity gains to avoid foreclosure and even to leverage these funds as investments in second homes.
"It has become an investment tool, allowing people to leverage their money," Lloyd said. For example, homeowners over age 62 could take the net proceeds from downsizing to a smaller home and then pay off the new purchase loan with a reverse mortgage. Or, assuming the homeowners live in their primary residence at least 50% of the time, they could obtain a reverse mortgage and use the proceeds as a down payment on a second home.
Although the loans have been available in various forms since 1961, it wasn't until the late 1980s that Congress allowed the FHA to insure what become known as home equity conversion mortgages and safeguards were put into place to protect both borrowers and lenders, starting with mandatory consumer counseling for all applicants.
Homes that may qualify
In general, eligible properties for the FHA program must be a principal residence and can include single-family homes, condominiums, manufactured homes built after 1976 or even two- to four-unit multifamily properties. Besides borrowers retaining ownership of the home for the duration of the loan, cash advances can be used for any purpose and don't count as income against Social Security or Medicare benefits -- although it can affect Medicaid and other state or federal assistance, so it's definitely best to check details with an attorney or local expert.
As reverse mortgages have become more commonplace, both the demographics of borrowers and their cash needs have changed.
