Those reverse mortgages are a good deal for elderly

Nation's Housing

April 02, 2000|By Kenneth Harney

TWO SPRIGHTLY homeowners in their late 70s -- Isabell Moore of Portland, Ore., and Wilbur Henry of Bethesda -- have a blunt message about home equity for their fellow seniors across the country: Don't just sit on that equity, use it! Have fun. Travel.

Don't deny yourself pleasures because you want to "save" all your equity to pass on to your kids or heirs.

Moore and Henry are at the vanguard of an important generational change under way among American seniors. Both own comfortable, well-kept homes in prosperous neighborhoods. Both have been retired for more than a decade, and gradually discovered that their fixed incomes aren't quite enough to keep up with the rising cost of living.

Equally important, both found themselves feeling hemmed in financially. They had almost enough monthly income to handle regular bills, but nothing to spend on the fun things that enrich anyone's retirement years.

"We got to the point," said Henry, "where we felt we couldn't even travel to visit our grandchild [in Illinois]. We were strapped and going nowhere."

Wilbur and his wife, Anne, solved their cash-flow problem in a way that a growing numbers of seniors are becoming more willing to try: They put a "reverse mortgage" on their home, pulled out a chunk of cash immediately, and are receiving monthly checks from their lender.

Since taking out the mortgage, they've financed some long-postponed home repairs, plus they've traveled to Italy, Spain, England, Portugal, Morocco and Mexico.

Moore hasn't used her money to travel the globe. Instead, she's created a miniature world of her own in her yard, with a pond, sprinkler system, lush garden plantings and flowers that bring her what she describes as "just enormous enjoyment -- it's my little paradise."

"I thought I could live on my Social Security," she said, "but you know, that's a very difficult thing to do these days."

When she heard about the concept of mortgaging her debt-free home, "at first it didn't feel right." What about her nephews and nieces to whom she'd always planned to leave the house? What about the golden rule of her Depression-survivor generation: Avoid debt at all costs?

But her prospective heirs told her to "enjoy yourself, don't worry about us." And, "They were right," Moore said. "For most [seniors], the [heirs] they're worried about probably have more money than they do anyway. They'll do fine."

The tool that Moore and the Henrys used is one of the least-understood forms of financial engineering of the last 30 years. As the name suggests, reverse mortgages work backward: Rather than the borrower sending money to the lender, the lender sends money to the borrower.

Though the idea of converting illiquid equity into cash has been around for decades, the concept took its first big leaps in the United States during the 1990s, when the Federal Housing Administration (FHA) and Fannie Mae began offering loan programs. Currently fewer than 10,000 seniors a year take out reverse mortgages -- far fewer than the estimated hundreds of thousands who are eligible and could benefit.

Reverse mortgages are restricted to homeowners 62 or older, and can provide custom-crafted mixes of lump-sum payments at closing, credit lines for unexpected expenses, and regular monthly checks. The payout amounts vary according to age and net home equity.

Though once used primarily by seniors facing financial emergencies, more and more middle- and upper-middle strata homeowners -- like the Henrys and Moore -- are using them to enhance their quality of life.

Yet many seniors and their relatives remain suspicious of reverse mortgages. Liz Scholz, a Fannie Mae expert on the subject, says that some families still believe that "the lender is going to take Mom's home from her" if she signs up for a reverse mortgage and lives for a long time.

But that's never the case. All commercially available reverse mortgages require no repayments to the lender until the senior sells the house or dies. Then the total of all payouts, plus accrued interest, is subtracted from the sale proceeds and sent to the lender.

The rest of the money, often substantial, goes to the estate of the deceased homeowner, like any other asset. Reverse mortgages carry consumer-protection features far beyond those of regular mortgages.

Thanks to decades-long oversight by the American Association of Retired Persons (AARP) and the National Center for Home Equity Conversion, all reverse mortgages come with hands-on counseling assistance unheard of anywhere else in mortgage lending.

Often, the loan officers form lasting personal ties with the elderly borrowers they help. Both the Henrys and Moore stay in regular touch with their loan officers.

For consumer information on reverse mortgages: AARP at 202-434-6042, or the National Center for Home Equity Conversion Web site, www.reverse.org.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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