A Timely Turnaround With a Reverse Mortgage
A Timely Turnaround With a Reverse Mortgage
By Martha M. Hamilton
Sunday, March 18, 2007; F02. The Washington Post.
Before getting a reverse mortgage, Frances Tolson’s financial life was a struggle.
Tolson, 64, receives Social Security and works two nights a week as a rehabilitation counselor for the mentally ill, but her income wasn’t enough to keep up with her medical and other expenses. “I’ve worked hard for a number of years,” she said. “Unfortunately, like a lot of people, instead of saving for these days, I used it on my children and grandchildren and great-grandchildren.”
She filed for bankruptcy because of her inability to pay creditors.
“I was feeling depressed and snowed under,” she said.
Now her monthly house payments are up to date and her creditors are paid, thanks to a reverse mortgage obtained last year that allowed her to borrow against equity in her house in Towson, Md. “When I receive my mail these days, I’m happy to receive it,” Tolson said. “I can afford to pay those bills. I’m no longer being choked.”
Tolson is part of a trend. Last year more than 75,000 reverse mortgages were issued, up from about 45,000 a year before. Reverse mortgages are becoming more common as homeowners and lenders think about ways to cash in on the $2.5 trillion in home equity in the hands of older Americans.
Reverse mortgages work the way they sound. The lender gives the homeowner a loan based on the value of the property and the age of the borrower, minus processing costs. The homeowner may take the money all at once or in monthly payments, or draw it down as needed. It’s not taxable income and it does not change eligibility for Social Security or Medicare.
The loan, which is only due if the borrower leaves the house for 12 months or more, uses the homeowner’s equity as collateral. It requires no repayment as long as the borrower remains in the house. At the end of the loan, the homeowner or heirs must pay back cash received plus loan costs and interest charged over the life of the loan, usually by selling the house.
For some consumers, reverse mortgages may provide relief from financial pressure or the wherewithal to pursue lifelong dreams. But they’re not for everyone.
One concern about reverse mortgages is that the upfront costs can be high, although proponents say that the fees are warranted by the work involved. The homeowner pays an origination fee and a mortgage insurance premium (most reverse mortgages are insured by the federal government) as well as a monthly mortgage servicing fee.
“The typical borrower is a 75-year-old widowed woman with a $250,000 house,” said Bronwyn Belling, of the AARP Foundation’s Reverse Mortgage Education Project. “It isn’t uncommon for costs, when they are added up, to be as much as $25,000.”
Most homeowners — about 85 percent — want to stay in their homes as they age, and reverse mortgages can make that possible. Sometimes the proceeds of the loan may be used to make the house safer and more accessible for homeowners with declining mobility. But experts caution that there may be cheaper ways to make those modifications.
Consumers who want to apply for a federally insured reverse mortgage are required by law to receive financial counseling beforehand to help them figure out whether this kind of loan makes sense. Lenders are required to send prospective borrowers a list of at least five counseling agencies approved by the Department of Housing and Urban Development.
Even with counseling, there is room for abuse, said Renee Shadel, an investigator in the consumer protection division of the Washington Attorney General’s office. She said her office has seen cases where someone discovers how much equity a consumer has, persuades the consumer to take out a reverse mortgage with a lump sum and then persuades the consumer to invest in risky or otherwise inappropriate investments. The scam artist makes money on commissions on the investments, she said. And a counselor, offering neutral advice about reverse mortgages, may not be persuasive enough to overcome the promises of a scam artist.
Consumers should talk over any reverse mortgage proposal with family members as well as with their attorneys or financial advisers, if they have them, Shadel said. “The main thing is we want them to be talking to other people and not being isolated by the salesperson and making the decision based on what they tell them to do.” Consumers should understand what the ongoing costs are and what happens to the property when they die, she said.
Until recently, relatively few lenders offered reverse mortgages, and Financial Freedom Senior Funding of Irvine, Calif., was virtually the only one making these loans on higher-cost properties. But, recognizing the opportunities, new providers are jumping in.
“There’s an enormous untapped market out there,” said Meg Burns of the consulting firm Potomac Partners and former director of single-family program development for the Federal Housing Administration, which oversees reverse mortgages.
With many new lenders about to enter the market, Belling says, consumers may want to wait a year or so to take advantage of new products and increased price competition. “If you don’t have a pressing need, it’s probably better to sit tight,” she said.
Tolson said she was uneasy with the first company from which she sought a reverse mortgage. She never spoke to anyone except by phone, and calls weren’t returned. Finally she ended up with a firm, Reverse Mortgages of the Mid-Atlantic, in which she had confidence.
The loan helped Tolson turn her life around, and it was worth the costs, she said. “I can breathe again.”
If medical expenses have taken a bite out of your retirement savings and you’re willing to have your name used in a column, please e-mail me at[email protected].
SOURCE: The Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2007/03/17/AR2007031700082_pf.html