Seniors Shift to Reverse Loans

When Stanley Brower, a retired graphic designer, had trouble keeping up the $670-a-month mortgage payments on his home in Palm Bay, Fla., he thought of a better idea: Have the bank pay him instead.

He signed up for a reverse mortgage from Lincoln Mortgage, which paid off his house and left his monthly budget $670 freer.

And he doesn't have to pay it back.

"It's been a lifesaver," he says. "Things were beginning to look rather ominous."

Reverse mortgages, also known as home-equity-conversion loans, can help retired people get income from the equity built up in their home.

"I call it the 'late-in-life trump card,' " says financial planner Jonathan Pond of Watertown, Mass.

Say a retired couple has a $100,000 home with the mortgage paid off. A reverse mortgage allows them to draw down that equity to finance retirement. Then when they pass away or move, the house is sold, and the proceeds pay off the reverse mortgage. Heirs receive the remaining equity.

Reverse mortgages only make sense for a few people - those over 62 years old and with small outstanding mortgage balances. They must also receive financial counseling from an approved adviser. And credit history doesn't matter.

Reverse mortgages "should be considered a last resort," says Mr. Pond, "because they're one of those irreversible decisions."

The counseling is designed to explore other options - such as selling the house, downsizing, or renting. Others may benefit from a traditional home-equity loan.

And if heirs hope to inherit and live in the house, they may be willing to help their elders with living expenses in the meantime, says Cindy Merrifield, a reverse-mortgage loan officer at Lincoln Mortgage in Cocoa Beach, Fla.

Reverse mortgages work best for people who have a good reason not to move.

But that doesn't mean seniors shouldn't seriously consider reverse mortgages.

Lee McCutcheon, a reverse-mortgage loan officer at Seattle Mortgage, says many of his clients are "living a deferral existence," putting off home or car repairs.

Many seniors have negative assumptions about reverse mortgages.

But the bank never takes ownership of the house. The loan is due when the house is sold or the occupant passes on. Heirs can pay off the mortgage and keep the house.

The bank requires that the house be kept in good shape. If not, some of the money may be set aside to make repairs.

Be sure to choose a reputable mortgage company. Scam artists go after seniors who feel vulnerable because they need money or lack trusted relatives and friends to guide them, McCutcheon says.

Never sign up for a reverse mortgage from someone who is actively selling it to you.

The amount of a reverse mortgage depends on three factors: the equity in the house, your age, and the interest rate.

There are two types of reverse mortgages, one insured by the Federal Housing Administration (FHA), the other backed by Fannie Mae, a quasi-federal agency. The FHA and Fannie Mae set their own rates, and they should not vary by lender. Fannie Mae caps the total loan value at $214,600. FHA caps are set by county and are generally much lower.

Reverse mortgages can be paid out in three ways:

* Monthly payments for life (called tenure) or for a fixed number of years. If the payments exceed the equity, the bank takes the loss. Your heirs don't have to pay the money back. The bank tries to avoid such losses with small monthly payments.

"People think [since] they've been paying $900 a month for 30 years, they should be able to get $900 a month out, but they're more likely to get $150 to $200," says Pond.

* Something similar to a line of credit. You can write checks up to pre-set limits.

* A lump sum. Ms. Merrifield usually recommends against this, except to pay off old mortgages, such as Mr. Brower's. The money is tax-free, because it is not income.

You can convert to another payment plan anytime for a $20 fee.

The National Council for Home Equity Conversion provides a calculator on its Web site that tells exactly how much you can get. Visit http://reverse.org

Experts expect the reverse mortgage business, while small, to increase dramatically as baby boomers reach retirement.

For Brower, it made all the difference.

Instead of scraping together monthly payments, he plans to take up painting. He doesn't have any children. "So why should I burden myself?" he says.

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