Commentary: Backup funds-Reverse mortgages allow seniors some

Although reverse mortgages have been around for years, they're now getting more attention, largely because the average life span continues to grow longer.

Put simply, reverse mortgages allow homeowners who are at least 62 years old to take a loan based on the value of their home. Unlike a typical home-equity loan, this loan, including interest, is paid off when the owner dies, when the property is sold or when it is vacated for more than 12 months.

The pros are many, and the cons are none, said Charlie Maykrantz, assistant vice president of 1st Mariner Mortgage Co. This is a case of old money being tied up in bricks, and it's a product for seniors whose time has come.

What this type of mortgage does, according to Jody Landers, executive vice president of the Greater Baltimore Board of Realtors, is to enable someone to take equity out of their home to supplement their income or pay off a debt. It's no different from a home- equity loan, except that you don't pay it back until the home is sold or the owner dies.

And there is no risk for the borrower, as the bank cannot take back the loan except upon the sale of the home, she added.

While some older people have been reluctant to accrue more debt after spending years paying off their mortgage, for many seniors - especially those on a fixed income - such a mortgage allows them to make improvements to the house, help grandchildren with college tuition, arrange for long-term care and to age in place.

There are three types of reverse mortgages: the FHA Home Equity Conversion Mortgage; Fannie Mae Homekeeper; and the Cash Account, which is provided by Financial Freedom, the largest provider of senior funding in the United States. The loans are insured by the Department of Housing and Urban Development. The owner still has the responsibility for his property taxes and homeowner's insurance.

The product is not a credit- or income-based loan, said Maykrantz. It is based on expected interest rates, the value of the home, as well as the age of the consumer. Everything is based on the actuary model that everyone will live to be 100, so the older you are when you apply for the loan, a higher percentage of your home's value will be available to you.

There are several options for payment: lump sum, line of credit, monthly payments for a specified time period or a combination of those three. In the case of a line of credit, for instance, interest is only charged on the money as it is used, not on the unused portion.

Who wins?

While reverse mortgages appear to be a good deal for the consumer, it's a bit harder to figure out the value to the lender.

True, the bank is taking a risk, said Landers. If a person lives for, say 30 years, the bank has to hold that note. The banks will eventually get their loan and interest back, but they'll have to wait.

On the other hand, the lender is not having to put out a huge amount of cash, he said.

Maykrantz sees a quicker return on investment for the banks that issue reverse mortgages.

It generates activity for the bank, creates more potential income and gives the bank a bigger client base to work with, he said. All these details account for a bank's growth in both revenue and in its stream of customers.

For presumed heirs, figuring out who gains and loses from reverse mortgages can be a confusing headache. Landers reports receiving calls from potential heirs and family members.

When they hear that their parents are considering taking out a reverse mortgage, they often voice concerns that their inheritance will be reduced or that it will be an onerous burden on them, he said. It's true that the estate will have to assume the mortgage's re-payment as well as its interest.

Potential heirs should bear in mind, however, that the lender doesn't want the home itself. It simply wants its money returned.

While the heirs might have concerns, it's great from the point of view of the owner: It's very much like drawing down from an IRA or a retirement savings account. And, while the end result may mean less money in the estate, it might also mean seniors rely less financially on their grown children.

I think this is the best mortgage product to come out in a good number of years and one that will really help the senior market, said Maykrantz. It will assist those who need financial help, help improve quality of life or enable people to do something that they otherwise could not afford.

Copyright 2005 Dolan Media Newswires
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