New twists on reverse mortgages More seniors find loans appealing

September 19, 1993|By James M. Woodard | James M. Woodard,Copley News Service

A new era is surfacing for the reverse mortgage industry -- innovative new versions are attracting a greater number of senior homeowners.

A reverse mortgage is a type of loan that allows senior homeowners to convert the equity in their home into a continuing stream of monthly income. It's basically a loan that is paid out to the borrower in monthly increments.

Typically, payments continue throughout the life of the senior, or at least until he or she sells or moves from the home. It is usually paid off in settlement of the estate.

Even though the concept is relatively new, it has progressed through an interesting evolution. And a new phase is beginning, says Ken Scholen, director of the National Center for Home Equity Conversion.

The first offering was a simple fixed-term reverse mortgage, usually limited to a term of five to 10 years, Mr. Scholen says.

During that time, the borrower would receive monthly payments. At the end of the term, the loan along with interest and costs would be paid off.

Then came the tenure mortgage, providing monthly payments for the borrower for as long as the home was owned and occupied by the senior. Then the "modified term" and "modified tenure" reverse mortgages surfaced, giving borrowers the option combine elements of both mortgage types.

Now there are reverse mortgages that are even more flexible and adaptable to special needs of senior homeowners.

Seniors can combine elements of a fixed term and tenure type of mortgage, and can change their mortgage type any time in the future as their situation changes. They can even build a reverse mortgage into a conventional mortgage, Mr. Scholen says.

Another option is to take funds from a new mortgage to purchase an annuity, which will in turn provide monthly payments for the senior homeowner for life, regardless of whether he continues to own and live in the residence.

Such flexibility permits borrowers to customize a plan that meets personal needs and goals. And it allows lenders to select the type and amount of risk they want to accept.

Reverse mortgages are now available in 44 states, according to Bronwyn Belling, director of the Home Equity Information Center of the American Association of Retired Persons. AARP, a major source of information on reverse mortgages, received more than 18,000 inquires during the past year on this subject, she says.

"One thing we learned for sure is that a large proportion of today's senior homeowners want to remain in their present home just as long as possible -- preferably for life," Ms. Belling said.

The plan is not right for every senior homeowner, though.

It ties up the equity in the senior's residence, and implementing the plan is expensive. It usually involves initial costs such as an appraisal fee of $200 to $300 and a lender origination fee ranging from $1,500 to $2,500.

If it's an FHA-insured reverse mortgage, there is also the cost of the insurance premium -- 2 percent of the "maximum claim amount" up front and a continuing monthly fee.

When inquiring about reverse mortgages, the first question most seniors ask is: "How much monthly income can I receive?"

The answer depends primarily on the senior's age (youngest of a couple) and the amount of equity in their home.

For example, If the senior is 65 years old and has $125,000 equity in his home, he can generate about $330 per month. If he is 75 with the same equity, the payments jump to $483. This is for a tenure (lifetime) payment plan.

For a typical term payment plan reverse mortgage for a senior with $125,000 equity, the monthly payments for a person 65 will be about $564 -- for a 75-year-old, $759.

As plan offerings become more flexible, the concept is becoming more appealing to a larger number of seniors. It's also becoming more complex.

So, it's important to have some knowledge about all options and to understand all aspects of a plan before signing up. Also, it's a good idea to discuss a reverse mortgage with an unbiased and knowledgeable counselor.

The best sources of basic information on reverse mortgages are AARP, 601 E St. N.W., Washington, D.C. 20049, or National Center of Home Equity Conversion, 7373 147th St. W., Suite 115, Apple Valley, Minn. 55124.

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