Home finance plan gaining popularity

Reverse mortgages on rise as more seniors choose to tap equity in their houses

Spending money, cash for bills

Owner's life expectancy, stake in property figure in determining size of loan

April 11, 2004|By James Gallo | James Gallo,SUN STAFF

More people than ever are applying for reverse mortgages as the financing plan gains popularity and lenders work to change a stigma sometimes attached to the loans.

According to statistics from the Department of Housing and Urban Development, during the first five months of the 2004 fiscal year the number of reverse mortgages nationwide increased 112 percent to 12,848 loans from the corresponding period a year earlier. In the Baltimore area during the same five-month period, there was a 119 percent rise in reverse mortgages to 138 loans compared with the 2003 period.

Reverse mortgages hit a record 18,097 loans nationally during the fiscal year that ended in September - 39 percent more than in 2002.

Some experts said more seniors are choosing reverse mortgages because they are living longer and are struggling to pay for long-term care. Others note losses in the stock market during recent years that forced many retired seniors to find jobs to pay for health care and other costs.

Rising home values have let more seniors tap into the growing wealth of their real estate.

But seniors should study the loan terms carefully and understand all the ramifications before choosing that option, experts said. Homeowners who tap the equity in their home may find themselves with little or no source of cash in the event of an emergency.

People older than 62 who own their homes are eligible to apply for a reverse mortgage. The mortgage is based on a portion of the home's equity and the homeowner's life expectancy. Lenders charge interest and fees for the loans, which can be used for any purpose, including paying off existing mortgages, medical costs, home renovations or recreation. A home equity conversion mortgage is the most common form of reverse mortgage, and it is the only one insured by the Federal Housing Administration.

A reverse mortgage loan is due when the senior moves out of the house or passes away. If the homeowner dies, his estate is responsible for paying back the loan. Many homeowners leave wills directing their estate to sell the home to satisfy the debt. But the estate sometimes is able to repay the loan through a new mortgage or through other means.

"One of the most common misconceptions about a reverse mortgage is that the bank takes the house when the senior dies, but that's not the case," said Mark McVearry, who handles reverse mortgages for Academy Mortgage in Baltimore.

Christopher Parr, a certified financial adviser with Financial Advantage in Columbia, does not usually recommend reverse mortgages until other options are exhausted.

"The first thing I ask a client is, `Is this house the best place for you to be, or is it a burden?' because sometimes seniors will enter a reverse mortgage and it may be better for them to move into a maintenance-free condo or a retirement community and use the money from selling their house if they still need more cash," Parr said.

Parr also urges that seniors examine closing fees and settlement costs before choosing a reverse mortgage. If the homeowner plans to use the money as a short-term solution, these additional fees may take a large piece of the loan.

"You have to make sure you read over the fine print first because sometimes the lender may keep some or all of the equity when the senior dies," said Jean Scarborough, owner of American Realty Consultants in Columbia. She recommends that the homeowner hire a lawyer to read over the contract before signing it.

Catherine Carter, 83, and her husband, Allen, 82, secured a reverse mortgage about a year ago to cover escalating bills that were outpacing their fixed income. The Carters received $135,000 for the equity in their house in Woodlawn and used it to pay off their mortgage. According to Catherine Carter, they still have a credit line of $37,000 they plan to use in emergency situations.

"We did it because it was getting hard to cover things like the mortgage with medicine getting so expensive," said Catherine Carter. "We weren't too interested in leaving everything [as an inheritance]. We'd rather just be comfortable."

Before signing up for a reverse mortgage, the Carters consulted their granddaughter, who is a lawyer.

The National Reverse Mortgage Lenders Association in Washington was founded in December 1997 with the purpose of helping to eliminate the stigma that has been attached to the loans.

Experts said predatory lenders have used the loans to take advantage of unsuspecting seniors and secure large pieces of the equity in their homes while charging exorbitant fees. Reverse mortgages also were considered a last resort for homeowners facing bankruptcy.

"Recently, we've seen a change in attitude where seniors are using reverse mortgages as a form of security or as a lifestyle decision," said Peter Bell, president of the National Reverse Mortgage Lenders Association. "Seniors need something to replace their discretionary spending, so they figure why not use the assets they already have in home equity?"

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