A Mortgage Aimed at Seniors

RISMEDIA, Jan. 9, 2007-(MCT)-In 1964, Alexander Paiva paid $18,500 for his ranch-style house in Bristol, RI's Hopeworth neighborhood. More than 40 years later, the property has an appraised value of $285,000.

Paiva, 64, retired last summer from his job as service manager at an automobile transmission shop. Some of his retirement benefits won't be available until he turns 65 this year.

To help tide him over, and to pay for a few extras, Paiva has tapped the equity of his home with an increasingly popular financial tool for the elderly: a reverse-mortgage loan.

With these loans, an elderly homeowner who wishes to continue living at home can get access to money that doesn't have to be repaid until he or she sells the house or dies.

The upfront costs of the loans are high, and they are not recommended for those planning to sell their house in the near future. Paiva's closing costs were $13,325, which included a payment of $5,760 for mortgage insurance from the U.S. Department of Housing and Urban Development's Federal Housing Administration. FHA insures an estimated 90 percent of reverse-mortgage loans issued in the United States. Most borrowers roll over the loan costs into their balance to keep their initial outlay of cash to a minimum, according to Chris Barnett, a spokesman for Rhode Island Housing.

Bill White, president of Ocean State Reverse Financing Inc., who worked with Paiva, said the loan insurance cost is 2% of the appraised value of the house. It protects the lender, but also guarantees that the "heirs or borrowers will never have to pay the lender more than the house is worth," he said. Without the insurance, he said, the interest rates for reverse mortgages would be higher than they are.
In the past week, interest rates for reverse mortgages were 6.5% for a monthly adjustable rate and about 8.25% for a rate that is adjusted annually, White said, and the loans have lifetime rate caps.

Borrowers have the option of taking their payments in a lump sum, as a line of credit, or in regular monthly payments.

In a recent interview, Paiva was unsure what his interest rate was, but said he is generally unconcerned with the rate because all the interest will be paid after his death. Paiva said he chose a line of credit, and a previous home equity loan was paid off as part of the transaction. The interest payments alone on that home equity loan were about $350 a month, he said, so he immediately had more free cash to use for expenses. Paiva also used some of his money for a trip to Reno last year and a cruise this month.

"That's what I think it's for," he said. "When it's gone, it's gone."

Barnett said Rhode Island Housing limits its reverse mortgages to those with a maximum annual household income of $93,300, but most clients make far less than that.

"Our average borrower is a single woman, age 75, with an income of about $15,000 a year," he said. "That's exactly the type of person who needs help paying the electric bill, that needs help paying for prescription drugs. Reverse mortgages really are a lifeline for seniors trying to decide between selling their home and paying their bills."

Barnett said that financial counseling "is a crucial component" of the reverse mortgage.

"It is such an important product that it deserves a real thorough understanding," he said. HUD requires counseling for borrowers, and consumer advocates such as the AARP have been working for better training and testing of counselors. Barnett said Rhode Island Housing provides "face to face" counseling for all its clients.

Rhode Island Housing has been offering reverse mortgages since 1989, but recently, more lenders have been attracted to the Rhode Island market because they are "seeing more opportunity here in the rapid rise in real estate values that Rhode Island has seen in the past five years or so," Barnett said.

To be eligible for a HUD-insured reverse mortgage, borrowers must be at least 62 years old. The amount that can be loaned depends on the borrower's age, the amount of equity, and the interest rates. Loans insured by the government cannot exceed a certain limit currently $362,000, according to Peter Bell, president of the National Mortgage Lenders Association, even if the value of the house is much higher. Uninsured loans are offered at higher amounts, and at higher costs.

In the fiscal year that ended September 30, 2006, 76,351 federally insured reverse mortgages, also known as home-equity conversion mortgages, were issued, up 77% from the previous fiscal year, White said. In Rhode Island, the number of reverse mortgages increased from 198 to 338. As the baby-boom generation begins to retire, the numbers are expected to grow.

Increased competition may eventually help drive down the high costs of reverse mortgages, according to Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. "We're just starting to see some competition," Scholen said. Until recently, "there was only one funder, Fannie Mae, and only one insurer, HUD, and we really haven't seen much competition on the fees. It's starting to change."

Loans sold on Wall Street recently got a better price than Fannie Mae has been paying, and HUD is looking into options for reducing origination and insurance costs, he said.
Scholen said he advises seniors considering reverse mortgages to wait, if they can. "If they don't have a really urgent need to do this now, they would be smart to wait until prices come down and they have more choices," he said.

Scholen said many seniors would like the option to "borrow less and pay less" with reverse mortgages, he said.

"It's good advice in general to wait," Scholen added, because "the older you are when you take it out, the more you can borrow."

He said he also advises seniors considering reverse mortgages to seriously research the option of selling their house and moving. Some seniors find to their surprise that new housing better fits their current needs, while for others, the process makes them more sure that they want to remain in their longtime home and "age in place."

"In either case, you come back with a better idea" of what you are buying when you take out a reverse mortgage, Scholen said. "You're buying the ability to stay in that home."

The upfront costs of the loans are high, and they are not recommended for those planning to sell their house in the near future.

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