At 75, Caryl Derryberry fell ill with pneumonia. Although the former antiques dealer had a Social Security check, she was having trouble meeting expenses on a limited income.
Like a growing number of seniors in Colorado and elsewhere, Derryberry turned to a reverse mortgage to help make ends meet. The instrument subsidizes her monthly bills and allows her to continue living in her own home. She has even used the money to replace a faulty air conditioner and furnace.
“I do not know what else I would have done, outside of selling my condo outright, and then I would still have had to find a place to live,” said Derryberry, of Lakewood. “This was a godsend, as far as I am concerned, once it was explained to me.”
Reverse mortgages let borrowers pay off existing mortgages using their home’s equity and withdraw the remaining equity in incremental cash payments. In exchange, they pay relatively high up-front costs.
Mortgage lenders have seen dramatic growth in the category over the past few years. The Federal Housing Administration endorsed a record 37,829 reverse mortgages during fiscal 2004, more than doubling its previous year’s loans. In fiscal 2004, such loans represented 3.8 percent of FHA’s entire single-family volume, and demand should continue to rise as more baby boomers reach 62, the minimum age required to qualify.
The U.S. Census reported in 2000 that 441,416 Colorado residents were 65 and over, and 330,024 were collecting Social Security income. Their mean income was $10,995 per year, or $916.25 a month.
“If a homeowner only has $20,000 left on their loan, they still might have an $800-a-month payment,” said Braiden Welsh, Broker at Apogee Mortgage Group in Denver. “A reverse mortgage can really take a big burden off their backs.”
Nelson Haynes of Deering Savings and Loan in Portland, Maine, issued the country’s first reverse mortgage in 1961 to Nellie Young, the widow of his high school football coach. The program reached national prominence in 1987, when the Home Equity Conversion Mortgage (HECM) insurance program was created.
It provided elderly homeowners with a financial vehicle for withdrawing home equity without selling and moving. The “reverse mortgage” name was adopted because the lender makes payments to the homeowner, the reverse of the payment pattern of traditional “forward mortgages.”
HECM loans are insured by the FHA and currently represent the vast majority of reverse mortgages.
“Before we really knew about reverse mortgages, we heard they were expensive and, like everyone else, just shoved them off to the side,” said Joshua Medvidofsky, president of Apogee Mortgage Group, the lender that handled the Derryberry reverse mortgage. “But when you apply it to real people, it really does help.”
Most homeowners over the age of 62 are eligible for reverse mortgages. Payments can be made to the borrower in a “lump sum” (the homeowner receives all or a portion of the equity at closing), a “draw account” (the money is available to draw upon as needed), a “tenure” (the borrower receives the same monthly payment until he or she no longer occupies the property as a principal residence) or a combination of any of the three.
The amount of equity available from a reverse mortgage depends on the age of the homeowner, the property’s appraised value and the maximum FHA loan amount for their county ($261,609 in Denver County). Reverse mortgage interest rates are not fixed, but are adjusted monthly or annually. The adjustment is capped at 2 percent annually and 5 percent over the life of the loan.
A reverse mortgage is generally the home’s “first” mortgage. If money is owed on the property, the homeowner generally pays off the old debt with reverse mortgage proceeds. As a result, seniors no longer make monthly mortgage payments, a key advantage for those living on a reduced or fixed income.
The amount of debt secured by the loan is not paid until the homeowner dies, sells the home or permanently moves out. Borrowers are never forced to sell to pay off a reverse mortgage, and the homeowner retains ownership of the property.
A reverse mortgage also limits a borrower’s liability to the value of the home, regardless of how long he or she lives in it before moving or dying. There are also no credit or income requirements to obtain the loan, and any money drawn is tax-free and does not affect regular Social Security and Medicare benefits.
But beware. Reverse mortgages – specifically HECM loans – have high up-front costs. Fees can run between 4 percent and 5 percent of the value of a home, while a traditional forward mortgage often costs 2 percent to 3 percent. They are not recommended for short-term use.
FHA insurance costs also can be steep, often 2 percent of the property value up to the county’s FHA lending limit. Reverse mortgages may also include a grocery list of other fees, but lenders are limited to origination fees of no more than $2,000 or 2 percent of the maximum loan amount.
Closing fees generally range between $5,000 and $10,000 and depend on the borrower’s age and property value. For instance, one 65-year-old borrower recently paid $9,497.50 in fees on a 4.89 percent HECM loan in Denver County for a home valued at $195,000.
A “service set-aside” fee is also added by the banker to cover transaction costs. This monthly fee can vary from lender to lender but cannot exceed $35.
“The fees were a real shock, and I am not over it yet,” Derryberry said.
All potential borrowers are required to attend free counseling with a HUD-approved housing counselor. A lender cannot start the reverse mortgage process until after the homeowner counseling has taken place.
The potential borrowers then receive a certificate that allows them to enter into a reverse mortgage within the next six months. If they do not close on their loan within 180 days of the counseling, they must go through the counseling again.
“Counseling varies quite a bit from those who know very little about reverse mortgages, to those who have done a lot of research,” said Catharine Carter of the Consumer Credit Counseling Service in Colorado Springs.
Telephone counseling is available through AARP.
“They think it sounds too good to be true,” Carter said, “that they can get this money, and not (having) to pay it back causes them to fear that they are going to be kicked out of their house as a result.”
Seniors are relieved when they find out that this is not true, she added.
Ultimately, the decision to get a reverse mortgage depends on each family’s complex situation. If a borrower is house-rich but cash-poor, a reverse mortgage may be a perfect solution.
“I can’t imagine not doing it again,” said Gary Bagley, a 66- year-old businessman who recently entered into a reverse mortgage. “I don’t know why a person would not like it.”
