By Bob Moos
The Dallas Morning News
August 24, 2007
Older adults hold $4.3 trillion in home equity. By 2030, when the youngest members of the Baby Boom generation retire, Americans 62 and older will have $37 trillion locked up in their houses, the National Reverse Mortgage Lenders Association predicts.
As a result, the reverse-mortgage business is booming.
Borrowers are expected to take out 120,000 of the most popular kind of reverse mortgage this year, a 57 increase from last year, according to the association.
And the push is not just coming from lenders.
AARP, the National Council on Aging, federal agencies and other groups have launched campaigns to help seniors understand how they can tap their home equity to pay for long-term care and other retirement expenses.
"We're telling older Americans that one of their retirement nest eggs -- besides Social Security, pensions and 401(k)s -- may be the nest itself," said Barbara Stucki, who's overseen the National Council on Aging's Use Your Home to Stay at Home project.
The public education campaigns mainly explain how reverse mortgages can help seniors cover in-home health care, pay off a current mortgage or home improvement loan, finance house repairs or supplement their Social Security or pension income.
With conventional mortgages, borrowers make monthly payments to lenders. But with reverse mortgages, the homeowners receive a lump sum, a monthly amount or a line of credit and don't have to repay the debt for as long as they live in their homes.
In most cases, the income is tax-free and generally doesn't affect someone's Social Security or Medicare benefits. When the borrower moves out of the house or dies, the loan becomes due, along with all fees and accumulated interest charges. The debt is usually paid off through a sale of the home.
But reverse mortgages aren't for every older homeowner looking for extra income. The borrowing costs can be high, so financial advisers usually recommend the loans only for seniors who intend to live in their homes for at least five years.
Betty Turner, who's 74 and lives in Dallas, said she used the $53,000 she got on her reverse mortgage from Judith O. Smith Mortgage Group Inc. to pay off decade-old debts, remodel her $90,000 house and buy a bank certificate of deposit.
"I didn't think I'd win the lottery, so I figured this was the next best way to give myself some peace of mind and fix up my house so I can keep living here," she said.
A reverse mortgage paid off Rosemary Sproles' conventional mortgage. Working with Reliance Mortgage Co., the 79-year-old Lubbock, Texas, woman netted $69,000 on her $104,000 home -- enough to free her from $500 mortgage payments and give her $12,000 in cash.
"It was like getting a $500-a-month raise," she said. "I live on my Social Security check and a small pension from my late husband, so the money comes in handy."
The reverse-mortgage industry's biggest player, Financial Freedom Senior Funding Corp., has seen its loan volume increase almost 17-fold in the last six years, from $300 million in 2001 to $5 billion in 2006. And chairman Jim Mahoney predicts the growth will accelerate.
"This business is still in its infancy," he said.
Even though 308,000 older adults have taken out a federally insured reverse mortgage since 1990, lenders say they've penetrated only 1 percent of the senior homeowner market.
The typical borrower has been a 74-year-old widow who has used the money to pay off home loans or other debts. But it's becoming more common for couples to take out reverse mortgages for such expenses as long-term care and prescription drugs.
The most popular reverse mortgage has been the Home Equity Conversion Mortgage insured by the Federal Housing Administration. But the loan limits may be too low for seniors with higher-priced real estate.
To serve that end of the market, more lenders are offering proprietary reverse mortgages.
The "jumbo" mortgages allow homeowners to borrow more than with the government-backed loans, but the loan costs are usually higher.
Lenders say reverse mortgages also are gaining appeal among seniors who want to avoid capital gains taxes on the sale of stocks. Instead, they're tapping their home equity for regular income and allowing their investments to continue to work for them. When they die, their heirs get their stock, without the capital gains tax liability.
In Texas, the reverse-mortgage business picked up momentum in 2005 once the state let borrowers draw from a line of credit. A majority now prefer that option to lump sum or monthly payments, said Scott Norman, president of the Texas Association of Reverse Mortgage Lenders.
"People like the flexibility," he said. "You can draw on it when you need it. Plus, you don't pay interest on any more money than you actually use."
Despite their benefits, reverse mortgages are no magic bullet. Financial planners say the loans may make economic sense for some seniors but not others.
The cost of borrowing can be steep. Origination fees and mortgage insurance will run 4 percent of the home's value or the maximum lending amount on the FHA loans, whichever is less. Other closing costs may total at least $1,000.
"On a $120,000 house, you're looking at $6,000 to $7,000 in fees," said Wayne Lancaster, senior loan officer for Bankers Financial Mortgage Group in Plano, Texas.
Also, the amount that someone receives from a reverse mortgage is considerably less than the house's appraised value. The exact amount depends on such factors as the borrower's age, the type of reverse mortgage, the home's value and current interest rates.
The older the borrower, the more money that person will get.
"A 62-year-old might get 45 percent of the home's value, while a 92-year-old might collect 70 to 75 percent," said Jim Elder, area sales manager for reverse mortgages at Countrywide Bank in Dallas. "The rest of the equity is to cover the interest."
Because of such considerations, Bill Clark, a retirement and estate planner in Frisco, Texas, recommends that his clients consider other ways to tap equity, such as downsizing.
"One option is to sell your house, then buy a smaller one and invest the rest," he said. "The interest or dividends can supplement your other retirement income."
One oft-cited drawback to reverse mortgages: Many older adults consider it important to pay off their mortgages and pass that asset onto their children.
Karen Kennedy, a reverse-mortgage specialist with One Reverse Mortgage in Dallas, said she urges her clients to sit down with their children and discuss what they're contemplating, so no one is surprised later.
"More often than not, there's no objection," she said. "In fact, the children sometimes are the ones who come to me and raise the idea in the first place. They only want the best for their parents, and they know a reverse mortgage may be able to provide that."
Peter Bell, president of the National Reverse Mortgage Lenders Association, predicts the next generation of seniors will be unsentimental about using their homes as a resource in retirement, partly because they'll have no choice.
Social Security's retirement age is rising. Traditional pensions are fading. The balances in 401(k) accounts are falling short of where they should be. And the average life expectancy continues to grow. Boomers are banking on home equity to rescue them.
"The oldest boomers turn 62 next year and will begin qualifying for reverse mortgages," Bell said. "That generation has always been accustomed to financial services."