Getting money out of the house

Reverse mortgages, which allow seniors 62 and older to withdraw cash against the value of their house, have seen rapid growth in recent years and are gaining steam as baby boomers begin to retire.

The number of such loans in Colorado Springs has surged 74 percent in the past four years, according to the U.S. Department of Housing and Urban Development. As many as 40,000 more people in El Paso County are forecast to be eligible for one in the next 10 years as the population ages.

The loans are gaining favor since their quiet 1989 debut in part because of seniors’ need for retirement income as company pensions evaporate and health care costs spike. In addition, more seniors are retiring with debt. Almost 60 percent of seniors carry debt today, up from 35 percent in 1992, according to SRI Consulting Business Intelligence. Reverse mortgages can be used for anything, including paying off debt and existing mortgages.

While reverse mortgages have created a new source of retirement income for seniors, experts urge seniors to understand the conditions that may outweigh the benefit of having access to a large sum of cash. The promise of using the equity in a house to fund retirement does have many pluses. They include allowing a senior to keep his or her house and not repay the loan and the costs until moving out or dying. That makes the expenses transparent while the senior continues to live in the house.

Demand is also being fed by the emotional attachment seniors have to their home. About 85 percent want to stay in their house, according to an AARP study, therefore creating a desire to take money out of their house to stay put.

“The benefit of a reverse mortgage is that it turns equity into cash and (seniors) can continue living in their home,” Tawyna Walters, home equity mortgage counselor at Consumer Credit Counseling Service of Greater Dallas, told Bankrate. com recently. “But the downside is that it can be expensive since they’re still responsible for paying taxes, insurance and maintenance on the house.”

The most prevalent concern is loan costs. They can be twice as high as regular mortgages.

Even if a senior stays in his or her home throughout retirement, it’s possible there will be no equity left in the house when they do leave or pass it to heirs.

“When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small,” write the authors of “Home Made Money: A Consumers Guide to Reverse Mortgages,” a publication of AARP.

Lenders point to rising home values as offsetting rising loan balances and making up for equity eaten by interest. But housing markets vary, and many have seen prices come down or growth slow. National median prices for existing homes, which have slipped since last year, are expected to recover to about 4 percent a year growth from 2009 to 2012 after surging about 10 percent a year earlier this decade, according to economic forecaster Global Insight.

Most home values don’t grow at consistently high rates, the AARP guide says. “So the majority of reverse mortgages end up being ‘rising debt, falling equity’ loans.”

Seniors who do make the commitment to stay in their homes must also be prepared to pay for upkeep. Lenders can require immediate repayment of the loan if the senior fails to maintain and repair the house, pay property taxes or keep the house insured.

Because seniors obtaining reverse mortgages tend to be cash poor, they may not have the funds for repairs, creating unsafe living conditions, said Stephen Golant, a University of Florida geography professor and expert on elderly housing.

“We have to be careful that we don’t romanticize the notion of older people aging in place in their own homes and be blind to the many downsides,” Golant said in a report to the Gerontological Society of America. “We’re really not doing older people a favor by encouraging them to age in place when it’s not particularly advantageous for their health, safety and quality of life.”

One of the biggest obstacles to overcome for seniors is becoming too emotionally attached to their home and not thinking about future needs, said Craig Carnick, a certified financial planner at Carnick & Co. in Colorado Springs.

Aging is a process, he said, and the easy availability of reverse mortgages today can create unhealthy financial situations during retirement. Carnick said he advises seniors to think whether their health will allow them to stay in their home, which may be difficult if it is a big house or has stairs. As seniors age they may realize they are better off in an assisted living facility, he said.

Carnick recommends seniors who are considering reverse mortgages include it as part of an overall financial plan and that children discuss the options with their aging parents. He also advises dealing with a lender offering a governmentbacked loan. With popularity growing, the market could become a breeding ground for unscrupulous mortgage brokers.

Another option for seniors is selling the house and downsizing, Carnick said. That way, the senior gets money out of the house without the obligations and cost of a reverse mortgage and the upkeep and higher expenses of a larger house.

Ultimately, whether a reverse mortgage is helpful or harmful relies on research, consulting and a bit of fortune telling.

CONTACT THE WRITER: dan.serra@gazette.com

A LOOK AT THE COSTS

- Reverse mortgages have about twice the costs of conventional mortgages, in part because of a required 2 percent of the loan value for insurance, which pays for government backing to protect the borrower from failures by lenders. In addition, another fee of 2 percent of the home value is added. Additional costs include appraisal, originating fee, title insurance, recording fees and monthly servicing fees. For a senior to receive about $150,000, the loan cost would total about $12,000, according to a lender work sheet.

- The originating fee and some customary closing costs are negotiable, making it worth shopping around.

- The actual interest rate on the loan is variable, making the total cost over time unknown depending on changes in rates and amount borrowed. But changes for a HUD-insured loan cannot increase more than 10 percent over the life of the loan.

- Rates are tied to one-year U.S. Treasury rates and are currently around 6 percent.

- Because of the costs, seniors are encouraged to stay in their house for at least five to 10 years to spread out the expense. If a senior leaves too soon, he or she can face a payback of thousands of dollars more than their initial loan.

HOW REVERSE MORTGAGES WORK

Instead of a loan where equity in a house grows, a reverse mortgage reduces an owner’s equity in the house over time as interest from the loan adds up. With longer loan periods, the equity could be lost unless the value of the house appreciates faster. The interest and closing costs are added to the loan balance, requiring no out-of-pocket expenses.

“Funds paid to the homeowner are tax-free and can be used for any purpose — from creating additional monthly income to paying for home repairs, travel, in-home health care or for investments and estate planning,” according to the U.S. Department of Housing and Urban Development.

Seniors can get a lump sum, monthly payments or withdraw from a credit line. The loan is not required to be paid off until the senior moves out of the house or dies, in which case the loan is paid either by the heirs selling the house or through inherited or personal funds.

A common misconception is that seniors could lose their home if they can’t repay the loan. Reverse mortgages come with safeguards to prevent that, such as allowing seniors to keep title to the house. Also, the repayment of the loan can’t exceed the value of the house, even if the price of the house falls.

HUD, the government agency that backs the loans, requires financial counseling, which is free, to make sure seniors understand the implications or head off any predatory lending pressures, said Chris Terry, a counselor at Consumer Credit Counseling Service in Colorado Springs. Counselors, however, are not in a position to tell seniors whether they should or should not take a loan, she said.

“We want people to understand the facts, the process and why they are doing this and if it is for them,” said Jane Goin of HUD’s Denver office. “We want to make sure they are well aware of their responsibilities in staying in their homes.”

MORE INFORMATION

- “Home Made Money: A Consumer’s Guide to Reverse Mortgages,” published by AARP. Call 1-800-209-8085 for a free copy.

- Department of Housing and Urban Development. 1-800-225-5342 or online at www. hud.gov/buying/rvrsmort.cfm

- Discuss reverse mortgages on Dan Serra’s Dollars & Sense blog at gazette.com, under Blogs.