News and Events
July 23, 2007
Sitting Pretty
Basics of Reverse Mortgage
Sitting Pretty
For Gloria Sullivan, the prospect of having to move from the
house where she's lived for the past 35 years to an apartment was unthinkable.
"It would be like a prison for me," the lively
82-year-old
Last year, Sullivan found a way to ensure that she'll have
enough money to stay in her house as long as she's physically able to: taking
out a reverse mortgage.
"I think it gives you peace of mind," said
Sullivan. She opted to pay her annual property tax bill last year off the top
of the proceeds from her reverse mortgage, and uses it as a source of money for
emergency home repairs as well as to augment her monthly income. "With
prices going up every day, it seems like it's pricing people out of their
houses," she said. "I think this is a great financial planning
tool."
As the nation's senior population continues to grow - the
number of people age 65 or older in the
At the same time, wealthy seniors with pricey homes are
beginning to use reverse mortgages as part of a strategy to reduce the taxable
value of their estates.
Congress has expanded the program several times by raising
the cap on the number of reverse mortgages that can be guaranteed by the
Federal Housing Administration. Now, lawmakers are considering permanently
lifting that cap, while at the same time capping the fees that loan originators
can charge.
With a reverse mortgage, anyone 62 years or older with free
and clear title to their home or a small balance remaining on their mortgage
loan can borrow against the value of the house. Unlike a home equity loan,
which requires monthly repayments, a reverse mortgage loan doesn't have to be
repaid until the borrower moves, sells the home or dies. It can be received as
a lump sum, a line of credit, monthly payments or a combination of these
methods.
"The amount of money you can get from a reverse
mortgage is largely based on your age," said Darryl Hicks, vice president
of communications for the National Reverse Mortgage Lenders Association. Among
the safeguards for the borrower is that the amount owed on the loan cannot
exceed the value of the home, even if the home value were to significantly
decline or interest rates rise significantly.
"So if you outlive the longevity tables and end up
owing more than the value, the heirs won't be responsible for paying more than
the value of the home," he said. "In most cases the estate will sell
the house to repay the loan, and whatever equity is left over will go to the estate.
In the case of
Some caveats, Hicks noted, are that seniors receiving Social
Security disability payments could jeopardize their eligibility by receiving
income from a reverse mortgage. Also, the interest that accrues over the life
of the loan isn't tax-deductible, unless the borrower makes special provisions
to pay the interest annually, which most don't do. On the plus side, he said,
the money is not considered taxable income.
Growth accelerates
Though reverse mortgages were first authorized by Congress
17 years ago, the product hasn't experienced significant growth until recently,
said Jeff Taylor, vice president of the Senior Products Group for Wells Fargo
Home Mortgage. The West Des Moines-based subsidiary of Wells Fargo & Co. is
the No. 1 reverse mortgage originator in the country, handling approximately
one out of every three
"It's been exhilarating to see the growth in the past
two years,"
Rising costs
Art Ousley, director of housing and education for Consumer
Credit Counseling Service Inc. in
"By and large, most of the folks I talk to are in some
financial difficulty," Ousley said. "They're either in the midst of
losing their house, or they can no longer afford the mortgage payment, because
they don't have enough money coming in. So the only way they're going to keep
their home and not sell it is through a reverse mortgage."
"It's not like they didn't plan," he said.
"It's just that they don't have enough; they're running out. They may have
Social Security, a pension and investments to draw from, but it's just not
enough."
By Joe Gardyasz
