AARP - Segunda Juventud - Reverse Mortgages

Building Blocks
A Look at Reverse Mortgages

By Holly Ocasio Rizzo
June/July 2005

Types of Reverse Mortgages

reverse mortgage calculator
(AARP.org)

basic loan features
(AARP.org)

Roy Ramos worked hard since arriving in Oakland from Mexico at age 17. He learned English and worked his way up to plant superintendent for a supermarket chain. With some of his earnings, he bought four rental homes and used the income to help provide for his six children.

Last year at age 69, Ramos took out a reverse mortgage on his own home in Norwalk, a Los Angeles suburb. He used the $159,000 loan to buy two duplexes in Rosarito Beach, a popular resort area just south of Tijuana, Mexico. “This will give me the chance to give each of my children a property,” he says. “Some children inherit nothing but debt.”

Reverse mortgages allow homeowners 62 and older to borrow against the equity in their homes. Borrowers make no monthly payments during the term of the mortgage and continue to live in their homes. Even if they exhaust the value of the mortgage, they cannot be forced to sell. When they leave permanently—through death or by moving elsewhere—the home is sold and the proceeds are used to pay off the mortgage company first, with the balance going to the estate.

AARP cautions homeowners to be certain a reverse mortgage is right for them before taking one out

Fueled by low interest rates and heavy marketing, reverse mortgages have soared in popularity, with the number doubling from 2003 to 2004. In the fiscal year ended September 30, the Department of Housing and Urban Development (HUD) closed more than 36,000 of these mortgages. According to HUD, the average borrower in 2004 was 74 years old, nearly 49 percent were single women, and the average value of property involved in the loans was $219,500.

For more information

A free copy of Home Made Money: A Consumer’s Guide to Reverse Mortgages is available in English from AARP by downloading a copy, ordering online, or by calling 800-209-8085 and requesting #D15601.

The Top Ten Things You Should Know if You are Interested in a Reverse Mortgage (HUD.gov)

HECM Resources (AARP Foundation's Reverse Mortgage Education Project)
“We’ve virtually doubled our activity in reverse mortgages each year since 2001, when there were 7,800 loans made,” says Sean G. Cassidy, deputy federal housing commissioner at HUD. “In addition to the low interest rates that generated more activity in all areas of the housing market, rising housing prices are giving senior citizens the chance to tap into home equity that may not have been available before.”

The federal government developed this type of mortgage in 1989, and HUD strictly regulates the industry providing the loans. The Federal Housing Administration insures the most popular type, the Home Equity Conversion Mortgage (HECM), which accounts for about 90 percent of reverse mortgages.

Reverse mortgages are intended to appeal to the older homeowner who does not have enough income to live comfortably, to make home repairs, or to pay property taxes. The money is taken as a regular monthly payment to the homeowner, as a line of credit the homeowner can draw on as needed, or as a lump sum. When taken as a line of credit, the funds remaining available in the account grow larger at a half-point more than the prevailing interest rate on the loan.

While reverse mortgages have their pros, they also have their cons:

• High interest amounts. Once cash is taken out of the home, interest is charged on that amount every month like a credit card. When the house is finally sold, the accumulated interest can significantly reduce the remaining equity.

• Up-front fees are higher than for a conventional mortgage.

• Loans typically require that the house be in good repair. Repair costs can be folded back into the loan, but the homeowner then will be charged interest on the amount—which could be large if the home needs a lot of work—until the house is sold.

• The interest rate is not fixed. It is tied to the variable rate on a one-year Treasury bond, about the same as a conventional mortgage.

• Homeowners cannot borrow the full value of their homes. This helps ensure that equity will be left in the house to pay off the loan.

Generally, the older the homeowner and the greater the home’s value, the more the homeowner can borrow. For example, a person age 85 can borrow more than a person age 65 on a home of equal value. Loan caps, based on where a home is located, also apply.

A reverse mortgage may not be every homeowner’s best choice, Cassidy says. “The statute that created the program requires that borrowers receive housing counseling when they’re considering a reverse mortgage,” he says. “It also requires that other financial options be explained to the borrower.”

AARP cautions homeowners to be certain a reverse mortgage is right for them before taking one out, and provides independent information and counseling to help them decide. AARP does not endorse any reverse mortgage lender or product.

Ramos says the application process was easy once he made the decision and was comfortable with it. “I have big faith in real estate. I read a lot, so I’d know what to expect in a reverse mortgage,” he says. “I didn’t do this for me. With the rental homes and Social Security, I have enough to live on. I did it for my kids.”

Use our web-exclusive reverse mortgage calculator to help you find out how much you could borrow.

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