Personal Finance > Your Home
Beat the bear with a reverse mortgage
If your portfolio's in the dumps, a reverse mortgage can supplement your retirement income.
November 6, 2002: 4:58 PM EST
By Annelena Lobb, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Glen and Alice Akins have washed their hands of money worries. After retiring several years ago, the Hollywood Hills, Calif. couple sprang for a reverse mortgage, allowing them to tap the equity in their home without having to sell.

Based on the value of their home ($400,000), the loan provides a monthly "paycheck" of $700. That's on top of their pensions.

"Although it's pennies to people who are working today, that extra income each month is like a blessing to us," said Alice, 79. She and Glen, 85 are both veterans of ABC News - he as director of engineering and she in radio and television. "We can buy extra things, we do a little better on our travels - we've traveled all over the world together. It's given us ease of mind."

They're hardly alone. Reverse mortgages, targeted to seniors, have become increasingly popular as homeowners look to unlock the value of their highly appreciated homes. As of Aug. 2002, 11,827 reverse mortgages on single-family homes have been approved by the Federal Housing Authority, up from 7,793 in all of 2001 and 6,638 in 2000.

"We're both retired on fixed incomes," Alice said. "Our pensions don't go up, so the cost of living was getting to be a bit of a problem as responsibilities like utilities doubled and tripled in size."

In essence, reverse mortgages pick up where home equity loans leave off -- since most banks won't approve equity loans to retirees with no source of income, said Fritz Elmendorf, chief economist at the Consumer Bankers Association. In the last few years, of course, they've proven especially helpful to retirees whose investment portfolios have felt the bite of the bear market.

"We were in the stock market for many years, and we made some money, but it was just too risky after we retired. Several of our friends, especially those who are in the stock market now, are seriously considering a reverse mortgage," Alice said.

The basics

A reverse mortgage allows homeowners age 62 or older to convert part of their home equity to tax-free income. Any money borrowed need not be paid back. In most cases, though, the borrower must own the home outright. Seniors "free up" part of their home equity, then receive it in the form of monthly payments, a lump-sum payment, a line of credit, or some combination of the three.

The facts: reverse mortgages
The loan provides tax-free income without having to sell, make monthly payments, or give up title.
The amount repaid can't exceed the home's value when sold.
Borrowers receive funds as a lump sum, monthly payments, a line of credit or some combination.
You must be at least 62 to take out a reverse mortgage.

The extra cash allows retired homeowners to stay in their homes longer, and maintain their standard of living.

The most popular reverse mortgages, available in every state, are Home Equity Conversion Mortgage (HECM) loans, from the feds, and Home Keeper reverse mortgages, from Fannie Mae. A 'jumbo' private reverse mortgage product, the Cash Account Plan, is available from Financial Freedom Senior Funding Corp, in some states only. Other reverse mortgages come from state and local governments.

Interest is repaid to your lender from your remaining home equity when the loan comes due: when the home is sold, or when the last surviving spouse passes away. One perk to consider: The amount due can never exceed the value of the home when it's sold, even if your home depreciates.

Seniors who choose a reverse mortgage with a line of credit only pay interest on the money they actually withdraw, added Jim Mahoney, CEO of Financial Freedom. What's more, you can arrange for a line of credit that earns interest on any money you don't use. Unused home equity earns interest at 5 percent a year using a Cash Account product. HECM lines of credit have variable interest rates.

Of course, reverse mortgages have their drawbacks, too. If you wanted to leave your home, potentially your greatest asset, as an inheritance for your kids, these loans will probably make that impossible.

"The pitfall is that there's no equity left for heirs," said Elmendorf. "But if you end up living in the house until you're 100, you've still managed to get a pretty good deal."

Reverse mortgages also can get expensive. You pay four types of fees: the first is the origination fee, which is up to 2 percent of the home's value or the equity limit in your county, whichever is less. You also will pay a mortgage insurance premium, which is 2 percent of the home's value up front, plus half a percent added onto the loan, said Ken Scholen, a spokesperson for AARP.

Then there are third-party closing costs to consider, like appraisals, title services and inspections, which vary tremendously. Last is a periodic servicing fee, from $25 to $35 a month tacked onto your bill.

To get a good deal, look for values on the origination fee and periodic fees, Scholen said, adding that the other fees for reverse mortgages tend not to fluctuate.

Choosing the right reverse mortgage

The amount you can tap from a reverse mortgage depends on many factors, said Sandy Cutts, a spokesperson for Fannie Mae. They include your age, the value of your house, the interest rates on each product, and the amount you'd pay in closing costs on each one. A person in their 70s could tap about $100,000 in equity on a $200,000 home with any of the products, said Justin Meise, a spokesperson for Financial Freedom.

On a $200,000 house, you might pay about 3 percent of the home's value, or $6,000, in closing costs, Meise added.

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Because these products are so complex, reverse mortgage counseling is required by law. Borrowers should ask their counselors to give them an estimate of how much they'll get with each product, Cutts said. To get a ballpark sense of how much equity you might be able to tap, try using the American Association of Retired Persons' reverse mortgage calculator.

In addition, HECMs and Home Keepers have limits, set by the feds, on how much equity you're allowed to tap. As of January 2002, the Home Keeper allows you borrow up to $300,700, if you qualify. ECM uses the same limits set by HUD for ordinary, or "forward", mortgages, which vary by county. Cash Account Plans, like the one the Akins chose, have no cap on the amount of equity you may tap.

The Cash Account Plan, designed for higher-value homes, currently has an interest rate of 6 percent, which adjusts every 6 months, Scabareti said. On the other hand, the HECM loan's annual rate hovers near 3.83 percent, and adjusts with the one-year Treasury bill. The Home Keeper's rate is about 5 percent, and moves with the 1-year CD.

If you go with an HECM loan, expect to pay an up-front mortgage insurance premium of 2 percent of the home's value or the lending limit, whichever is lower. You won't pay that fee on the Cash Account Plan or Home Keeper loans.  Top of page

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