Vertical Lend News - The Ins and Outs of Reverse Mortgage

benefit from Social Security as her only source of income. Meanwhile, major home repairs, such as a new heating system and roof, loomed and her real estate taxes were more than $5,000 a year.

"I was in trouble," said Scheffler, 76, of Copiague. "It was 'lose the house or do something.'"

What Scheffler did, upon the urging of her 48-year-old son, Dennis, was obtain a reverse mortgage. With her house appraised at $260,000, Scheffler qualified for a lump sum payment and line of credit, collectively worth $195,000. She used most of the money to pay for the major repairs and back bills, and left the rest in the credit line. Scheffler taps the credit line periodically to pay her taxes, which have gone down substantially since she took advantage of property-tax relief programs for seniors.

The reverse mortgage "really helped me a lot," she said. "It's given me peace of mind and security."

Scheffler is among a growing number of older homeowners who have turned to reverse mortgages to cope with rising housing and medical costs. Because CDs and other fixed-income investments now offer low returns, many seniors face a growing gap between income and expenses. At the same time, 80 percent of seniors own their own homes -- an asset that in recent years has climbed significantly in value. A reverse mortgage is used to help turn around someone's financial situation by tapping the value of the house to generate income.

"In areas like Long Island, there are a lot of people who are house-rich and cash-poor," said John Macca, a reverse mortgage specialist at Wells Fargo Home Mortgage in Hauppauge who helped Scheffler get her loan.

Reverse mortgages allow homeowners who are at least 62 years old to convert a portion of the equity they've built in their homes into cash. This cash can be taken as a lump sum, a line of credit or monthly payments that can last as long as one stays in the house -- or some combination of the three. The total amount of these adjustable-rate loans varies, depending on how the reverse mortgage is structured, your age, how much equity you have and the value of your home. (If you still owe money on your home, some reverse mortgage lenders will pay it off with part of the loan proceeds.)

The reverse mortgage is particularly appealing for some retirees because income generally is not taken into account in the qualifying process and no medical tests or histories are required. Also, income received from the reverse mortgage is tax-free, the loan advances are not taxable and they generally do not affect Social Security or Medicare benefits. The principal and interest on the loan are not due until you die, sell the house or move out permanently (live elsewhere for more than 12 consecutive months). Moreover, the repayment of the loan can never exceed the value of the house, a feature known as the "nonrecourse limit."

But there may be downsides as well.

For instance, the lender holds some -- or all -- of your home's equity while you still must pay taxes, homeowner's insurance, maintenance and other expenses on the property. If you or your estate cannot repay the loan when it comes due, the house must be sold to repay the lender. (You or your heirs would be entitled to any funds remaining after the loan is repaid.)

Reverse mortgages also bring an array of closing costs and monthly service charges with them. Most of the fees can be folded into the loan so they are not paid out of pocket, but it still could be a big financial hit, noted Bronwyn Belling, a reverse mortgage specialist at the AARP Foundation in Washington, D.C.

And because interest is added to the loan principal and compounded monthly, the loan amount goes up quickly over time.

Before deciding on a reverse mortgage, prospective borrowers should carefully review their financial needs and estate planning for their children, as well as consider what kind of lifestyle they want during their elder years, experts say.

"There are plenty of people who come in here who we tell, 'This is not the right thing for you at this time,'" said Susan Lagville, executive director of Housing Help Inc., a nonprofit counseling service in Greenlawn.

Nationally, the number of reverse mortgages insured by the Federal Housing Administration -- which account for 90 percent of the market -- hit a record 18,097 in the fiscal year ending Sept. 30, 2003, according to the National Reverse Mortgage Lenders Association in Washington, D.C. That's a 39 percent increase over the 13,049 loans closed the previous year.

In Nassau and Suffolk counties, these FHA- backed loans, known as Home Equity Conversion Mortgages, or HECMs, were up 30 percent during that time, to 402 loans issued from 309 the year before, according to the U.S. Department of Housing and Urban Development. In New York City, HECMs were up 40 percent, to 332 loans, from 239 the year before.

These mortgages, with their cap on repayment cost, were created by Congress 15 years ago in response to many reports of seniors getting thrown out of their homes when their reverse mortgages came due and they couldn't repay because their debt exceeded the value of the house.

The other two types are Home Keeper loans from Fannie Mae and the Financial Freedom Cash Account from Financial Freedom Senior Funding Corp., a private Irvine, Calif-based lender. The latter is generally used for more expensive homes, since the government limits the loan amount on federally insured reverse mortgages. Loan limits vary by county -- no more than $230,319 for Long Island and Queens.

Before signing on to an HECM or Home Keeper mortgage, applicants must obtain counseling from a HUD-approved service, such as Housing Help.

"These are complicated financial instruments, and they involve one's major financial asset. It's really important to look under the hood," said AARP's Belling.

While emphasizing that reverse mortgages require careful consideration, experts acknowledge that the loans can alleviate dire financial stress for older homeowners.

Jerry Style, president of Freedom Financial Services, a tax and financial planning firm in Bohemia, recently helped a couple in their early 70s get a reverse mortgage. They live in Ridge in a condominium valued at $200,000. Their income from Social Security is $1,200 a month, but their expenses, including condo charges of $250 a month, are $1,500.

Selling the condo and moving into less-expensive housing was not an option. "Where else could they live for $250 a month?" said Style.

The couple is getting $700 a month by tapping the equity in their condo. Combining that amount with their $1,200 a month in Social Security, they can cover their expenses and put the rest in savings.

They are still independent; they are putting money in savings, and they can stay in the condo the rest of their lives, he said.

Not everyone who gets a reverse mortgage needs the money right away. Some people establish a line of credit with their reverse mortgage to cover possible future expenses, such as the cost of home health care or a new furnace, noted Peter Bell, president of the reverse mortgage lenders association. "Reverse mortgages are being recognized as a solution to numerous situations," he said.

Lloyd Trotman, an 80-year-old former bass player who lives in Huntington, got a reverse mortgage in August, anticipating that he would need home health care. Trotman has a progressive disease that is weakening the muscles in his legs. "I'd rather die than go into a nursing home," he said.

A reverse mortgage on his house valued at $300,000 gave him a $20,000 lump sum payment, plus a line of credit worth $160,000. That line of credit will increase in value as he gets older -- lenders offer higher credit limits to older consumers because they figure they'll be paying out the borrowed money over less time.

"I felt if I could get enough money, I could pay for someone here," he said. "It's fantastic for someone of my age who can live free of worry."

Because of the government cap on what you can owe, a reverse mortgage can be a particularly good deal if you come from a long-lived family and/or you expect property values to fall. The reason: If you select the option of taking a monthly payment for life, and you live a long time, you could well end up taking more money out of the house than the house is worth. Similarly, if you are taking monthly payments and real estate values fall, you or your heirs will still owe no more than what the house is worth upon its sale.

"If you take your payments long enough or property values fall enough, you could end up with a loan that costs practically nothing," said Belling, the AARP Foundation specialist.

On the other hand, a monthly advance is not indexed to inflation, so as your bills march higher over time, the payments won't keep up.

Generally, the older you are, the lower the interest rates are, and the more valuable your home, the more money you can borrow.

"You can get $100,000 to $300,000 at an interest rate of 3 percent with minimal out-of-pocket costs, and it's tax-free," said Cynthia Synan, executive vice president at Vertical Lend, a network of financial advisers who originate mortgages in Melville.

But closing costs on reverse mortgages can be significant -- on Long Island, as much as $12,000 to $14,000, on par with some conventional mortgages.

Those costs include fees paid to the lender, fees paid into the government-run insurance fund -- which kicks in should you live longer than your average life expectancy or property values decline -- plus title insurance, recording fees, appraisal fees and loan servicing fees, among others.

Besides getting a handle on costs, people need to decide which payout method or combination of methods they want to use and whether they want the interest rate on their loan to adjust monthly or yearly.

More money is generally available on loans that adjust monthly, but the limits on how high rates can go over the life of the loan are tighter on annually adjusting loans. Interest rates paid by homeowners on reverse mortgages are currently 2.8 percent on monthly adjustable loans and 3.4 percent on annually adjusting loans.

Scheffler, the Copiague resident, said she spent many nights going through the 11/2-inch-thick stack of papers detailing her reverse mortgage. "There were clauses and more clauses," she said.

Also, people have to remember they're still responsible for paying real estate taxes, utilities and other expenses associated with keeping up the house, noted Steven Stern, an elder law attorney and partner at Davidow, Davidow, Siegel & Stern in Islandia. As those costs rise, the likelihood that people will begin to burn through their credit lines is great, he says. If the house has to be sold because of those expenses, there will be little equity left for the person to buy a smaller house.

"In my opinion, reverse mortgages are a short-term solution," he said. "I think you're going to see some very disappointed seniors five years from now."

In fact, many advisers say people should consider other options before going the reverse mortgage route. There are numerous federal, state and local programs that can help cover home-repair bills and medical expenses, provide additional income or cut property taxes, Belling noted.

For example, if someone is not going to stay in his or her house a long time, it's not worth it, most experts say. The closing costs are a large part of what you owe in the early years of the loan. As your loan balance grows over time, though, the start-up costs become a smaller part of your debt.

"We stress that these are for people who want to live in their homes for the rest of their life," Housing Help's Lagville said. Nor are they appropriate for parents who want to leave their homes to their children. The reverse mortgage will take a chunk out of the equity.

Penny Sheppard, housing counsel at Housing Help, said she almost never recommends a reverse mortgage to someone in his or her 60s. The monthly payments at that age are fairly small and by the time someone is in their 70s or 80s, their taxes, utilities and health-care costs are likely to be much higher. If someone needs more money at that point, his or her equity will be tapped out.

"Reverse mortgages absolutely should be a last resort," Stern, the elder law attorney, said. "There are plenty of things people can and should do first."

What alternatives does he advise people to consider? "You at least have to raise the issue of selling the house and scaling down," Stern said. "That should always be on the table." Sometimes, however, a reverse mortgage is the only option.

Terry Scheiner, an attorney and court-appointed guardian for the property of a 78-year-old woman who has Alzheimer's and lives in Sands Point, has found that to be the case.

This woman's only sources of income are Social Security and alimony, which total $1,200 a month. But, her expenses include $15,000 a year in real estate taxes and $100,000 a year in home health-care expenses.

"We've used up all the other assets. All we have is the house now," Scheiner said.

In December 2001, Scheiner took out a reverse mortgage when the house was valued at $850,000, netting $281,000. With that money running out and the home's value rising to $1.13 million, Scheiner took out a second reverse mortgage in November. After paying back the first loan, which cost $313,000, she netted another $100,000.

Scheiner figures the two reverse mortgages have succeeded in keeping her client in her house for three years beyond what her other resources were able to support. When the $100,000 from the last reverse mortgage runs out, the house will have to be sold to pay back the $417,000 loan plus interest. After repaying the loan and paying costs related to selling the house, Scheiner figures her client will net about $500,000, which will be used to pay for nursing-home care.

"A reverse mortgage is a wonderful product, given the right situation," Scheiner said.

Because of their complexity and costs, it is critical that people do their homework and seek the advice of professional counselors and family members when considering a reverse mortgage, financial experts say.

But even knowing how expensive his reverse mortgage was -- closing costs totaled $12,000 -- Trotman, the Huntington resident, said it was worth it. "I got $180,000. Instead of the money sitting in the house, I can use it," he said. "I'm very cool with that."

Virginia Munger Kahn is a freelance writer.
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