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Original Photographs by Kathy De La Torre * Photo Illustration by Cindy Couling
Reverse mortgage taps equity in home
Loan can be complicated
By Jean Newton
A reverse mortgage could be the answer for senior citizens with abundant home equity but not enough income to maintain a comfortable lifestyle. As one of the hottest new programs in the real estate industry, reverse mortgages enable older homeowners to convert the equity in their home to cash, without selling their home or giving up title.
In a reverse mortgage the lender pays the borrower, instead of the other way around.
These special loans can be complicated. Research and investigation are important steps in understanding the process. Borrowers must be at least 62 years of age for most reverse mortgages, occupy the home as a principal residence and apply for them by signing loan papers.
"A reverse mortgage is a mortgage that pays senior citizen homeowners their equity, like a line of credit, but in reverse. Homeowners can withdraw amounts that total against the equity in their house. They never have to make a payment. The loan, which is based upon the amount they drew out, is paid off when their estate is settled. In this way, the senior citizens of the area can tap into their large equity positions without having to worry about how to make the payments," said mortgage consultant Jimmy Kang of Wells Fargo Home Mortgage in Burlingame.
Until recently, senior citizens only had two options to get cash from their home. They could either sell their home and then have to move out, or they could borrow but incur regular loan payments. A reverse mortgage becomes the third option for seniors who are eligible to take out a loan they don't have to pay back as long as they live in their home. The cash can be paid all at once, taken as a regular monthly advance, or used as a credit line that allows the homeowner to choose how and when to use the cash. The loan must be paid back in full, plus interest, when the last living borrower dies, sells the home or permanently moves away. With a reverse mortgage, homeowners continue to own their homes so they are still responsible for property taxes, insurance and repairs.
There are several different kinds of reverse mortgages available. State and local governments offer "public sector" loans that often must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered through the "private sector" by banks, mortgage companies and saving associations. These loans can be used for any purpose.
Costs associated with reverse mortgages include the origination fee, an appraisal fee and other charges similar to those for regular mortgages
According to the National Reverse Mortgage Lenders Association--a nonprofit trade association representing lenders, financial service and other professionals involved with reverse mortgages--the loan amount for a reverse mortgage is based on the homeowners equity, the value and location of the property, current interest rates and the owner's age at the time of application. Generally the older the borrower, the larger the loan amount. No credit or income requirements are necessary to qualify for a reverse mortgage and medical history is not a factor. Applicants do not have to furnish medical records or undergo a physical exam. The borrower, however, must receive counseling, or consumer education in advance.
A reverse mortgage counselor provides information about the mortgages, including which mortgage product is most suited to an individual's situation, and gives senior homeowners alternative options to consider besides the reverse mortgage. A reverse mortgage lender can provide the names of approved counseling agencies and facilitate the education process.
As one of the leading advocates for senior citizens, AARP offers a "buyer beware" checklist and examines the issues to help seniors understand the entire procedure. The AARP cautions seniors to avoid "predatory lenders" who use high-pressure sales, inflated interest rates, over-the-top fees, unaffordable repayment terms and collection harassment. In addition to "if it sounds too good to be true, it probably is too good to be true" these caveats apply:
* Be wary of anyone who calls on the phone or comes to the door offering "bargain loans." Most legitimate mortgage lenders or credit companies don't show up at the front door;
* Find out what the total cost of the loan will be before making a decision and compare prices with other lenders;
* Avoid lenders who have a limited time offer or promise speedy action if money is paid immediately;
* Don't be afraid to ask questions about the total cost of the loan, the annual percentage rate, the monthly payments and the details for paying back the loan;
* Make sure to read all documents carefully and don't sign anything until a lawyer or trusted friend or family member reviews the loan papers.
AARP's website, www.aarp.org, contains detailed information about all aspects of reverse mortgages and offers a free booklet called Home Made Money: A Consumer Guide to Reverse Mortgages. In addition, senior citizens can check out these websites for more information about reverse mortgages, as well, at www.reverse.org and www.reversermortgage.org.
A well-known, reputable bank, financial institution or lender is also a good resource for finding out the requirements and ramifications of a reverse mortgage. Mortgage consultant Jimmy Kang said Wells Fargo has established a special reverse mortgage division to aid seniors in understanding their financial options. "A reverse mortgage can be a great way to get either an additional monthly source of funds, or a large amount of cash, to make major repairs, or purchases without losing your home due to nonpayment. This allows our seniors to enjoy the golden years of their life in comfort," said Kang.
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Saratoga, California Since 1955
