Personal Finance Changes make reverse mortgages cheaper, shorter

By Dave Carpenter

AP Personal Finance Writer

Buried in debt and struggling to pay her monthly bills, Robin Miles resisted a reverse mortgage as a possible way out of those problems.

It would cost a lot, she knew. It sounded gimmicky. And she worried about taking a big risk at an age when you can't afford a mistake.

Reverse mortgages -- loans that allow borrowers age 62 or older to convert home equity into cash -- unquestionably are expensive. AARP says costs can commonly total 10 percent of the home's value. Yet Miles' other fears have proven unfounded so far, and taking a reverse mortgage gave her the financial breathing room she needed.

"It was salvation for me," says the 70-year-old Pikesville, Md., resident. "I just wish that more seniors weren't so afraid of it."

Reverse mortgages are most often used by seniors who want to stay in their house for the rest of their lives. Generally, the loans shouldn't be their first option. Downsizing, moving to a more appropriate living situation or tapping any other assets first often makes more sense.

Still, some recent changes have widened their appeal. They include lower upfront fees and a new reverse mortgage that's insured by the government.

Such changes mean that now reverse mortgages can make sense to address shorter-term considerations -- either for adding retirement income or for getting cash out of a home if it's hard to find a buyer. An important plus for seniors is that the payments they receive are not taxable and don't affect Social Security or Medicare benefits.

"This is a loan where you really need to be careful to understand what your options might be," says Barbara Stucki, vice president for home equity initiatives at the National Council on Aging, a nonprofit advocacy group. But in the right circumstances, she says, "it can provide more flexibility."

Here's a closer look at reverse mortgages and how they've changed.

Reverse mortgages work like regular mortgages, only in reverse. Instead of the homeowner paying the bank every month, the bank pays the homeowner. This can be in some combination of a monthly check, access to a line of credit, or a lump sum.

The amount a borrower can seek depends on several factors, including the home's value, current interest rates and the age of the borrower. The older the owner, the higher the amount. If the home is owned by more than one person, the age of the youngest person determines the amount. A couple in their mid-60s who own a $250,000 home, for example, might be able to get $130,000 or more from a lump-sum reverse mortgage, according to AARP.

Reverse mortgages are repaid from the sale of the home. And the amount becomes due, in full with interest, when the borrower moves, dies or fails to pay property taxes or homeowners insurance.

Borrowers often were warned in the past to be cautious about these loans because of the potential for scams. The possibility of abuse has receded because there are virtually no private offerings any more. The Federal Housing Administration is behind today's loans. The FHA doesn't make loans itself but insures lenders against any losses on loans called Home Equity Conversion Mortgages, known as HECMs (heck'-ums).

Last month the agency introduced a lower-cost reverse mortgage called the HECM Saver that provides smaller loans but also significantly reduces upfront fees. Lenders also have been lowering or waiving upfront sales charges in order to draw more business.

"It's a whole new world in reverse mortgages," says Peter Bell, president of the National Reverse Mortgage Lenders Association.

All the changes, coupled with the tough economy and depleted retirement savings, are likely to generate more borrowers closer to 62.

Miles, who's divorced and semi-retired from her career as an antiques dealer, survives mostly on Social Security. As the economy soured, business dried up and by last year, she was overwhelmed. Her monthly income was less than her $2,000 mortgage payment, and after a refinancing she owed $316,000 on the home she bought in 1998. So she took out a reverse mortgage for the entire amount, paying about $11,000 in closing costs, including mortgage insurance. Now the lender sends her a check every month, and she is comfortably able to pay taxes, insurance and upkeep.

Her son and two daughters now don't stand to inherit the house or much if any equity now that she has tapped it. But they support her decision, Miles says, because she is much happier. "This saved my sanity."

The coming flood of baby boomers into retirement, many of them short on savings, will likely drive more people to seek similar solutions. Reverse Market Insight, a website that provides data for the industry, estimates 95,000 to 100,000 reverse mortgages in 2011, up roughly 30 percent from this year.

But not everyone is as well-suited for a reverse mortgage as Miles was. David Certner, AARP legislative policy director, cautions that those who take out larger amounts -- on the Saver or on HUD's earlier-established reverse mortgage, the HECM Standard -- face sharply higher ongoing monthly insurance premiums that could hurt them over the long run. The premiums total 1.25 percent of the loan balance, up from 0.5 percent.

The changes are beneficial for seniors overall, according to Ted Sarenski, a personal financial specialist who chairs the ElderCare/PrimePlus committee for the American Institute of Certified Public Accountants. But they don't change his advice, and that of numerous other experts, that reverse mortgages should be pursued mostly as a last resort.

"It's a way to stay in your home without having to liquidate it and move," he says. "But the home is usually the last asset that you own. If you still have IRA money, or pension money coming in, you probably shouldn't look to a reverse mortgage."

Published: Tue, Nov 9, 2010