How would you like your bank to hand you a monthly mortgage payment instead of the other way around?
That's what happens with a reverse mortgage. Seniors who own their homes outright, or nearly so, can boost their income in retirement by getting tax-free cash from the equity they've built up _ even as they remain in their homes.
However, consumer advocates warn that a reverse mortgage must be approached carefully, because it comes with steep fees and other pitfalls.
"This is a way to turn their largest and last asset into a cash flow," said Jan McLain, a reverse mortgage counselor at the Consumer Credit Counseling Service of Greater Dallas. "But it's a costly loan to get."
As baby boomers age, the financial services industry is poised to pitch more reverse mortgages to older Americans. And with soaring medical costs and dwindling employee-sponsored health benefits, hammered stock investments and measly savings returns, more retirees are turning to vehicles such as reverse mortgages to meet their needs.
Nationwide, sales of the main kind of reverse mortgages grew from 8,127 in 2001 to 14,181 in 2002. As of July, the number is at 10,608, according to the National Reverse Mortgage Lenders Association.
In a reverse mortgage, seniors 62 and older can take a loan against their homes and receive monthly payments from the lender as long as they live. Or they can take a lump-sum payment. Or they can choose to take monthly payments for a certain period, say 10 or 15 years. In many states borrowers also can get a reverse mortgage line of credit.
Borrowers retain the title and ownership of the home. The lender, however, gets a lien.
"The big misperception about reverse mortgages is that when you take out that loan, you lose your title and your ownership," Norman said.
The principal and the interest on the reverse mortgage are not due until the borrower or borrowers die. The loan also has to be paid off if the borrowers sell the home or move out for more than 12 months. Sometimes the loan is paid with proceeds of the sale of the home after the owners' deaths.
The Texas Association of Reverse Mortgage Lenders said the typical customer for a reverse mortgage is a couple between 65 and 80 years old with a home value of $60,00 to $260,000.
A reverse mortgage is a complex product. It can be a great option for seniors who need additional income to meet their living expenses, particularly if the home is their only big asset.
But there are downsides. If you want to leave your home to your kids free and clear, a reverse mortgage will prevent that.
A reverse mortgage comes with high costs. Origination fees may be as high as 2 percent of the value of the home, as may mandatory mortgage insurance. There are costs for title insurance, an appraisal, a survey and a servicing charge that can reach $35 a month.
"It's a loan that you would want to take only if it's for the long term," said David Carey, senior consultant at Fannie Mae, the mortgage giant. "You would not want it for the short term."
Typically, the interest rate for a reverse mortgage is variable. Borrowers can choose whether they want the rate to change monthly or yearly. Unlike regular mortgages, consumers don't have to shop for rates, because the rate is based on a formula set by Fannie Mae, a set amount added to the yield of the one-year Treasury bill. Currently the rate for the monthly option is 2.85 percent and 3.45 percent for the annual option.
However, consumers do need to shop for the right kind of service and for lenders that can discount some of the costs.
For most reverse mortgages, borrowers are required to attend a counseling session, typically with a counselor approved by the Department of Housing and Urban Development. Counselors can help seniors thrash out the pros and cons. Consumers are encouraged to take their heirs with them.
"You must look at all alternatives," said Norma Garcia, senior attorney at Consumers Union. "If you have certain financial needs, you have to look at all your assets."
She said seniors should examine government benefits and tax breaks before they consider a mortgage product. Counselors also say borrowers should consider whether they could sell their homes and get the cash they need without ever taking out a loan.
"The single most important thing to do is to seriously consider selling and moving _ even if it's the last thing on your mind," said Ken Scholen, a reverse mortgage specialist at AARP. "When you do that, it allows you to put the reverse mortgage in perspective and compare it to something else."
A reverse mortgage also can affect eligibility for "need-based" programs such as Medicaid. But it does not alter benefits from programs such as Social Security and Medicare.
With a reverse mortgage, there is much less danger of a foreclosure, because there are no payments made on the loan.
But homeowners are responsible for the upkeep of the property, and they must be sure they have enough money to pay the insurance and property tax. If they fall behind on these payments, the reverse mortgage lender could foreclose on the home, as with any other mortgage.