Today's borrowers who use reverse mortgages represent every level of the economic spectrum.
Chris Warner, a reverse-mortgage consultant with MetLife Bank in Bethesda, Md., says he has helped homeowners in countless situations, from a couple borrowing against their multimillion-dollar Georgetown home in order to make a substantial donation to a university to an elderly low-income woman who needed money to repair her home and her health after a home invasion. That woman not only was able to fix her home. but also had enough home equity to receive substantial monthly cash payments through a reverse mortgage even after she had paid for repairs.
"While few traditional-mortgage borrowers give me a hug after the closing, it is very common to have that happen after we close on a reverse mortgage," Mr. Warner says. "Most people are just so relieved to have that financial pressure relieved."
Reverse mortgages are available to homeowners age 62 and older. Approval for a reverse mortgage is based on a sliding scale tied to the homeowners' age and the appraised value of the home, not the creditworthiness of the borrowers or their income.
A reverse mortgage enables the homeowners to access the equity in their home. Rather than making a monthly mortgage payment, the homeowners receive money from the lender in the form of a lump sum, a line of credit or monthly income. Though interest charges are applied to reverse mortgages, the interest is added to the loan balance and will not have an impact on the payments received by the homeowners.
When the owners move or die, the loan must be repaid by the owners or their heirs or by selling the property. If there is equity left over after the loan is repaid, it is returned to the owners or their heirs.
As long as the owners maintain the home and pay their property taxes and homeowners insurance, they continue to own the property and will always be able to live in it. As with any other homeowner, failure to pay property taxes could lead to a foreclosure.
"A reverse mortgage is different from a standard mortgage because the property stands for the loan, not the homeowners," says Gary Onks, branch manager of Security One Lending in Fredericksburg, Va. "This is a total non-recourse loan, so that even if the appraised value of the home drops below the reverse mortgage balance, no other assets from the owners or the heirs can be attached to repay the loan. The loan will be repaid by the sale of the home, and if a balance is still due, this will be paid to the lender by the FHA insurance fund."
While some senior homeowners have eagerly embraced the option of a reverse mortgage to borrow against the equity in their homes, others have been wary, worried about the high upfront costs of the loan and misunderstanding some of the details about how these loans work.
FHA-insured reverse mortgages were introduced in 1989, although the product has been around since 1960, says Russell Rothstein, a division director for American Home Bank Reverse in Rockville, Md. Ninety-nine percent of all reverse mortgages are FHA-insured mortgage loans, known as Home Equity Conversion Mortgages, or HECM.
"The perception has been that reverse mortgages are more expensive in terms of fees and closing costs than other mortgages, but the biggest cost has been the mortgage insurance required by the FHA," Mr. Rothstein says. "The other costs are similar to the closing costs on a regular mortgage."
In 2010, the FHA introduced the HECM Saver mortgage, with lower upfront costs in exchange for a lower borrowing limit. Upfront mortgage insurance costs on a standard reverse mortgage are 2 percent of the appraised property value, while the saver version requires an upfront mortgage insurance premium of .01 percent of the home value. Both reverse mortgages require a monthly insurance premium charged at an annual rate of 1.25 percent of the outstanding loan balance. Reverse mortgage borrowers generally wrap all fees and closing costs into the loan amount, with the exception of the appraisal fee.
"In addition to the saver option for a reverse mortgage, a couple of other changes that have taken place in the past couple of years have created a new enthusiasm for these loans," Mr. Warner says. "First, a fixed-rate option was introduced, which a lot of people prefer over an adjustable-rate mortgage. Second, a number of lenders, including MetLife, decided to lower the origination fees and servicing fees on a reverse mortgage to make them more attractive to borrowers."
Mr. Rothstein says that while borrowers can benefit from the reduced cost on a saver reverse mortgage (saving $12,000 on a $600,000 home, for example), they also will have their borrowing power reduced by about 20 percent compared with what they can borrow on a standard reverse mortgage.
"The saver reverse mortgage works best for people who need a smaller amount of money," Mr. Rothstein says.
Mr. Onks says most of the homeowners with whom he works need to use the standard reverse mortgage product because they need to access the maximum possible equity to meet their needs.
"Ninety percent of the reverse mortgages we do are taken out to replace an existing mortgage or home equity loan or both," Mr. Onks says. "At least 60 percent of our applicants barely meet the qualifications for the loan because they lack sufficient equity in the property."
The saver option limits the percentage of equity that can be borrowed, even if the homeowners own their home without a mortgage.
As an example, Mr. Onks says that on a $400,000 home without any existing mortgage or home equity loan, a 65-year-old homeowner could borrow $241,221 with a standard fixed-rate reverse mortgage, $193,180 with a saver fixed-rate reverse mortgage, $192,420 with a standard adjustable-rate reverse mortgage and just $159,980 with a saver adjustable-rate reverse mortgage.
The amount that can be borrowed rises as the homeowners age.
"There are basically four types of reverse-mortgage options," Mr. Rothstein says. "Borrowers can choose a fixed-rate or an adjustable-rate standard HECM or a fixed-rate or adjustable-rate saver HECM. The fixed-rate options both require that borrowers take out the money in a lump sum. The adjustable-rate loan, which can adjust monthly, offers borrowers more choices."
Borrowers can choose a lump-sum distribution at the closing, a guaranteed monthly income or a line of credit with the adjustable-rate reverse mortgage, or a combination of these options.
"The monthly income option is guaranteed for as long as the homeowners live in the property, even if the mortgage balance rises above the value of the home, but this is only available with an adjustable-rate loan," Mr. Rothstein says.
When taking out a reverse mortgage, borrowers must pay off their existing mortgage - if they have one - in full, either with cash or with the proceeds from the reverse mortgage. Some borrowers choose to take out a reverse mortgage simply to pay off their existing mortgage and eliminate monthly payments.
While many homeowners use a reverse mortgage to make home improvements or pay for maintenance needs that enable them to live more comfortably in their property as they age, there are homeowners who prefer to move into newer housing and downsize. This type of homeowner can use a home-equity loan for the purchase.
"I've worked with several people who want to move and yet want access to the equity they have built up in their home," Mr. Warner says. "They can do this by using the equity from their home sale to purchase their next home. At the closing for that property, they can also take out a reverse mortgage so that they have access to some of the cash that they used to buy the home."
Mr. Warner says he worked with a retired postal worker in Silver Spring, Md., who used a reverse mortgage for a move-up purchase, moving from a town home to a single-family home.
"Another customer sold his home in the D.C. area and bought a home in Bethany Beach with about half the cash from the home sale," Mr. Warner says. "He took out a reverse mortgage on the Bethany Beach place right away so he has additional cash for expenses and no monthly mortgage payments."
Homeowners with equity available in their home often turn to a home-equity loan or line of credit when they want to access the value in the property, but not all seniors can qualify for one.
"A traditional home loan requires income and credit qualifications as well as requiring the homeowners to make monthly payments on the loan balance," Mr. Warner says. "In addition, these homeowners will not have the option of taking out a reverse mortgage in the future until they have paid down the home-equity loan so they have equity available again."
There are many issues to consider before committing to a reverse mortgage.
"All reverse-mortgage applicants must receive counseling from a HUD-approved counselor in order to make sure they understand all the ramifications of the loan," Mr. Rothstein says. "I also think it is extremely important for the seniors to have their family members there so that everyone understands what is happening."
Mr. Rothstein says it is important to work with a lender who will listen to the seniors before recommending a reverse mortgage.
"The best way to find someone who does a lot of reverse mortgages is to check with the National Reverse Mortgage Lenders Association," he says. The consumer website for NRMLA is www.reversemortgage.org.
"The homeowners need to sit with someone who will discuss their needs and help them figure out how to achieve what they are trying to accomplish."
Mr. Warner says the first question to discuss with a reverse-mortgage consultant should be why it is being considered.
"If someone wants to pay off their mortgage, then they are more likely to want a fixed-rate, lump-sum reverse mortgage," Mr. Warner says. "Those who want extra cash flow are more likely to want the adjustable-rate mortgage that provides a guaranteed monthly check for as long as they live in the home."
While Mr. Onks says most of his customers now take out a reverse mortgage to pay off their existing mortgage, many of them also choose to pay off credit-card debt or other bills in order to provide for better monthly cash flow.
"Some borrowers choose to help their adult kids or their grandchildren, basically giving them their inheritance now instead of when the house is sold," Mr. Onks says.
Mr. Rothstein divides reverse-mortgage borrowers into those with needs and those with wants.
"The 'needs' borrowers are those who want to grow old in their home but need to make the home handicap-accessible or take care of deferred maintenance," Mr. Rothstein says. "A few years ago, I worked with two sisters in their 90s who had plenty of equity in their home but had drained their savings. They used the reverse mortgage to fix up their home and create cash flow, and now one of them is 100 and they still live there."
Mr. Rothstein also has worked with seniors who own their home without a mortgage but need the income from a reverse mortgage to pay the property taxes.
"The 'wants' borrowers have equity in their home and want to use it to travel, to give to their families, enlarge their home or for estate planning to create a trust fund," Mr. Rothstein says. "There is a different story for every person."
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