Personal Business: RETIREMENT PLANNING
MORTGAGE THE HOUSE-NO PAYMENTS REQUIRED
Two years ago, 82-year-old Drexel Yorke considered selling her home of 48 years.
She still loved the circa 1750 five-bedroom beauty on close to two acres in Chappaqua, N.Y., but on her limited pension and Social Security income, the retired dancer couldn't afford to pay $10,000 a year in real estate taxes and help her two grandsons through college. Yorke was seriously thinking of moving when her ballet teacher gave her a clipping about reverse mortgages. "It's the most wonderful thing," says Yorke, who feels "Atlas has picked up the world" from her shoulders. Yorke now has access to a $175,000 line of credit, which she has drawn down by $25,000.
Demand for reverse mortgages, which allow people 62 and older to borrow against the equity in their home if the property is paid off or close to it, is on the rise. Of the 25,000 written since 1977, roughly half have come in the past four years, according to Ken Scholen, founder of the National Center for Home Equity Conversion. "This is a way for a house-rich, cash-poor person to free up assets and stay in the home."
Scholen expects interest to swell even more this fall when the Federal National Mortgage Assn. starts offering a reverse mortgage with a limit of $203,000. That's $50,000 more than the amount insured by the Federal Housing Administration. And the government-backed Fannie Mae plan is more secure than those of uninsured private companies. FHA and private reverse mortgages are available in every state except South Dakota and Texas.
With a reverse mortgage, a borrower takes out a loan at a predetermined rate and promises that when he or she dies or moves out, the bank will receive its principal plus accrued interest from the property's sale. The bank never owns the home--and you aren't in danger of losing it unless you fail to pay your insurance or taxes or let it go to waste. Of course, many people tap their equity through a home-equity loan. But you don't repay a reverse mortgage as long as you're living in the home, and you can qualify with little income.
It's possible for a loan to absorb or exceed the entire equity. If an owner of a home valued at $100,000 gets a reverse mortgage that pays $10,000 a year based on a life expectancy of less than 10 years and then lives 20 years, the lender will pay at least $100,000 above the value. Since reverse mortgages are nonrecourse loans, meaning the lender can't go after other assets or heirs, borrowers must buy insurance to cover that risk. With the FHA's Home Equity Conversion Mortgages, insurance is paid up front, at 2% of the home's appraised value. Private lenders pass the cost along in higher interest payments.
Borrowers must also pay appraisal and other closing costs. These are added to the amount owed when the home is sold. For this reason, Bronwyn Belling, a housing specialist at American Association of Retired Persons, calls reverse mortgages "front-ended" and says they're not a wise choice if you plan to move in a couple of years.
How you collect depends in part on why you need the mortgage. If you come up short when bills are due, you may want a monthly payment. If you need to pay off a debt, you'd likely take a lump sum or a credit line. A lump sum erases risk that a private lender may not be able to meet future payments. And the older you are, the more equity you can borrow against.
With all of these options, take your time deciding. If you don't feel strongly attached to your home, simply selling it will provide a debt-free means of raising cash. Assess how well your home will age with you: Some require extensive retrofitting since many older residents have trouble with stairs or must use a wheelchair. All FHA borrowers must meet with a counselor before an approval is granted. Counseling is free and also available to private-lender borrowers.
Starting on Oct. 1, new truth-in-lending rules mandate clear disclosure of the total cost of every loan, but many lenders provide this already, so ask for it. For more information, send $24.95 for Your New Retirement Nest Egg to the National Center for Home Equity Conversion, 7373 147th St. West, Apple Valley, Minn., 55124. A list of national reverse-mortgage lenders is available (free to all) in the AARP's Home Equity Conversion Information Kit (D15601), AARP Fulfillment (EE0903), 601 E St. N.W., Washington, D.C. 20049.
A reverse mortgage can help cash-strapped retirees who love their homes. But make sure you choose the right one. Even Atlas has his weaknesses.Nanette Byrnes Comparing Reverse Mortgage Plans