After years of lingering in the shadows, the reverse mortgage, which helps senior citizens tap the value of their homes, is moving into the spotlight.
Within the past year, two local companies have begun to offer these mortgages. Loans are now available from International Mortgage Corp., a Pikesville-based company, and Reverse Mortgages of Maryland Inc. of Homeland.
Nationally, there now are about 100 lending institutions providing reverse mortgages -- about twice the number as last year, according to the American Association of Retired Persons.
"Slowly but surely, I've seen these instruments develop from just an idea in a few academics' and consumers' minds to becoming more of a reality," said Ken Scholen, director of the National Center For Home Equity Conversion and author of "Retirement Income On The House."
Mr. Scholen attributed the increase in availability of these loans to the recent expansion of a Federal Housing Administration program. In the program, the FHA insures home equity conversion mortgages (another term for reverse mortgages) provided by approved lenders.
As of last spring, the FHA began to permit any approved lender to write an unlimited number of FHA-insured loans. In a pilot program that lasted from 1988 to 1989, the number of loans had been limited to 2,500 nationally.
The recent activity is good news for cash-strapped senior citizens, according to the AARP. "These loans can make a really dramatic improvement in the quality of life for some people," said Bronwyn Belling, a housing specialist with the AARP. "It can make a difference between literally surviving hand-to-mouth and having peace of mind."
But much confusion still exists about what a reverse mortgage is and how it works.
Simply put, a reverse mortgage is the opposite of a traditional mortgage. Rather than starting out with little equity and a lot of debt, as with a traditional mortgage, you begin with much equity and no debt. Then, as you receive monthly installments (or a lump sum up front, or a line of credit) that represents the equity in your home, you build up your debt and reduce your equity.
Like a home equity loan, a reverse mortgage permits you to draw on the equity you've built up in your home without moving out of it. But unlike the home equity loan, you don't have to worry about paying it back unless you move out of the house. When you move, or die, the proceeds from the sale of the house are used to pay back the loan, plus interest. Also, you don't need an income to qualify for a reverse mortgage, as you would with a home equity loan.
"The main thing is that this allows you to get some money out of your home without having to pay it back for as long as you live there," Mr. Scholen said.
Loans vary depending on the company providing them, but typically they are available only to those who are 62 and older. Most offer customers a number of options for receiving the money, including a lump sum, a line of credit or monthly payments. You are usually able to combine some or all of these options.
Since your life expectancy plays a part in calculating the monthly amount you'll receive, many financial advisers counsel waiting until you are in your mid-70s to take out a reverse mortgage.
"The important thing for consumers to understand is that the older you are, the better these work, because they're tied to life expectancy," Mr. Scholen said.
If you want to preserve some of the equity in your home for your heirs, you can usually arrange to sign up for a mortgage that will draw on only part of your home's value, according to Mr. Scholen. You can also use part of an initial lump-sum payment to make an early bequest.
The loans aren't cheap. At Reverse Mortgages of Maryland Inc., which sells non-insured mortgages offered by Capital Holding Corp., a financial services company with headquarters in Louisville, Ky., you will be assessed a 7 percent "guarantee fee" on the current value of the home, as well as $3,000 in closing costs -- both of which are added to the balance of the loan.
That balance can add up. The loan for an 85-year-old man whose home is appraised at $150,000 could accrue $103,506 in interest over a 10-year period, assuming the interest was calculated at a rate of 10.58 percent. The loan balance after that period, including the initial fees, would be $251,406. (Of course, that figure looks less alarming after you take into account the presumed appreciation of the home.)
As an alternative, the man might obtain a home equity loan of about $115,000 -- about three-quarters of his home's value. If he paid back the money as a fully amortized loan, his payments would add up to $208,895 over a 15-year term. That assumes a stable interest rate of 8.5 percent (such loan rates often fluctuate as the prime rate changes) and closing costs of $5,000.