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Reverse mortgages pay back
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Christine L. Romero
The volume of federally backed reverse mortgages, accounting for about 90 percent of them, more than doubled to 12,848 nationally between October and February compared with the year-earlier period. Although the pace seems staggering, that's still a small slice of the overall mortgage market. Reverse mortgages, which have been around since 1984, are taking some time to gain full strength because these loans, known formally as home-equity conversion mortgages, require a reversal in thinking. The mortgages most people are familiar with are "forward mortgages." Reverse mortgages allow homeowners to get loans that deliver money from the property's equity on a line of credit or in monthly or lump sums. Instead of making payments to the lender, that company pays the homeowner. Homeowners owe interest on what they borrow, but they don't have to repay the loan until they move, sell or die. In the case of a home that depreciates, the government takes the hit instead of the homeowner or heirs. There are some requirements to qualify for the loans, backed by the Federal Housing Administration. Some financial planning experts warn of high closing costs and caution that reverse mortgages don't make sense for everyone. "Classic financial planning says if you are in a negative cash-flow position, there are other problems that need to be addressed," said certified financial planner Michael Black of Scottsdale's Michael Phillips Black & Associates. Cash-strapped seniors who are facing soaring medical costs, for example, should consider assistance programs or other methods for cutting their spending before jumping into a reverse mortgage, Black said. But Dorothy Liles isn't complaining. The 81-year-old east Mesa resident opted for a reverse mortgage to be free of her monthly mortgage. She receives Social Security payments and believes her monthly finances would be overly tight if she had a house payment. "It would be really tough. I just pay my taxes and insurance," Liles said. "I have a whole new lease on life. It's wonderful." On a federally backed reverse mortgage, homeowners must pay an FHA insurance premium amounting to 2 percent of the home's value, and another 2 percent for other items such as the escrow fee, origination fee, title insurance and home appraisal. Most of the fees are added to the loan balance, minimizing out-of-pocket expenses. Future estimates anticipate that reverse-mortgage volume will increase by 25 percent annually as baby boomers hit retirement age, said Jeffery Taylor, Wells Fargo & Co. vice president for senior products. He cautions that reverse mortgages are best for people who plan to stay in their home for at least three years, given the closing costs associated with the loan. Those wary of reverse mortgages "say it's very expensive, but my response is, 'Compared to what?' " Taylor said. "You cannot compare a reverse mortgage to a regular mortgage. I view a reverse mortgage as a social-security guarantee."
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