The Arizona Republic - January 2007
It's hard to live on $448 a month.
So Darlene Branson turned to her home equity to help supplement her monthly Social Security payments by taking out a reverse mortgage.
A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home without having to sell the home, give up title or take on new monthly mortgage payments. Loan proceeds can be used for any purpose. They can be taken out as a lump sum, fixed monthly payments, a line of credit or a combination.
Branson joins a growing number of seniors who are getting reverse mortgages. According to the National Reverse Mortgage Lenders Association in Washington, D.C., the number of Federal Housing Administration-insured reverse mortgages jumped by 77 percent nationally during the past federal fiscal year, which ended Sept. 30. The FHA insured 76,351 such mortgages last year, compared with 43,131 the previous year.
In the Valley, the situation is even more dramatic: In 2006, 2,438 reverse mortgages were issued, compared with 720 in 2005. That's about a 339 percent increase.
Darryl Hicks, associate director of the NRMLA, attributes the increases to several factors:
• Rising household costs.
• Insufficient retirement income. Many people rely on Social Security, which may not cover all of their expenses or needs.
• Increased awareness about reverse mortgages. TV ads, with actors James Garner and Robert Wagner touting the advantages, have helped get the word out.
Also, more lenders are offering reverse mortgages.
Reverse mortgages aren't new. They've been available through the FHA since 1990; before that through other lenders. But for years, they've been the subject of misconceptions. Potential borrowers mistakenly thought they had to give up title to their homes or that the government would get their homes when they died.
Other seniors, especially ones who lived through the Depression, felt embarrassed to borrow money or didn't want to go in debt.
Now, many people use reverse mortgages as a financial planning tool.
Here's how a federally insured reverse mortgage works:
• How much you can borrow depends on your age, current interest rates and the value and location of your home. For Maricopa County, the FHA loan limit is $254,600.
• It's not a case of shopping around for the best deal.
• You are required to undergo mortgage counseling to make sure that a reverse mortgage is ideal for you.
• The repayment amount can't exceed the value of the home.
• After the reverse mortgage is repaid, remaining equity is distributed to you or your estate.
• The money you borrow can be used for whatever you want, including prescriptions, home improvement, travel and food.
One client lived in a home that had no heat or air-conditioning. Her income was $600 a month; her house payment was $373 monthly. The woman spent the winters moving from a chair to her bed, wrapped in an electric blanket. After refinancing her home to lower her interest rate, the homeowner took out a reverse mortgage, paid off the first mortgage and bought a heat pump.
Reverse mortgages aren't for everybody.
Hicks, the NRMLA associate director, said that if you plan to move in a year or two, you may want to explore other options. Upfront fees - title insurance, appraisal fee, loan origination fees and mortgage insurance premiums - often can equal 5 percent, even as much as 8 percent, of the maximum claim amount or amount you can borrow, he said. Other options, such as home equity lines of credit, may be less expensive, he said.
Also, depending on how you plan to spend the money, another loan may be more suitable. For example, if you need to repair your roof, another type of loan may be less expensive.
Other considerations include:
• When you take out a reverse mortgage, your debt is increasing, while your equity is decreasing. If you plan to leave your home to your children when you die, this may be an issue.
• Fees and costs associated with your reverse mortgage can be financed.
• A rising number of private lenders are offering their own versions of non-federally insured reverse mortgages, Hicks said.
Some of the private programs have lower fees than federally insured programs, Hicks said.
For Darlene Branson, a reverse mortgage made sense.
After retiring three years ago, Branson, who is 78, was worried about paying for the maintenance of the Glendale house she shares with her husband, William. She mentioned this to her sister, who suggested she take out a reverse mortgage.
Branson now gets a monthly stipend of $500 and has a line of credit in case emergencies occur. She can keep the house in good repair - she has had the patio roof redone - "and have a little fun on the side," she said. She's taken a two-week trip with her sister to Hawaii and is looking forward to additional trips.
"It's a great peace of mind," Branson said. "I can go to sleep at night."
