REVERSE MORTGAGES GAIN POPULARITY

June 22, 2009
More seniors turning to reverse mortgages

INDY-STAR

By Nicole Blake

When Judy Kralik and her husband, Andrew, downsized and moved to Valparaiso in 2005, she thought life would be easier. But when her husband of 47 years died from esophageal cancer less than a year later, things got tough: her income did not comfortably cover her mortgage and other living expenses.

"Our income just really went down, and I was on Social Security," Kralik said.

Kralik, 69, turned to a reverse mortgage to get the extra money she needed. She now receives a check each month for about $435 that will continue for the rest of her life.

Like Kralik, more seniors are using reverse mortgages to tap into their home equity and pay off debt. Reverse mortgages allow the borrower to receive income in monthly installments, a lump-sum payment or a line of credit from which the borrower can make periodic withdrawals.

The loan becomes due only when the property is sold or the youngest borrower on the mortgage dies, and the house is used as collateral for the government-insured loan and interest.

Mortgage brokers such as Bob Allen say reverse mortgages have become part of a "normal retirement plan."

"The reasons people take them out are as varied as people's lives," said Allen, who also has a reverse mortgage.

Statewide, the number of reverse mortgages rose 20 percent from 669 in 2008 to 803 this year. And nationally, reverse mortgages -- known as Home Equity Conversion Mortgages -- jumped 5 percent from 73,875 to 77,908 during the same period.

When Allen saw his 401(k) plummeting, he knew something had to be done. Upon retiring at 65, Allen and his wife, Zeta, got a reverse mortgage on their five-bedroom Hobart home and are now receiving $518 a month to supplement their retirement income.

Loan amounts are largely based on the borrower's age, home value and current interest rates, and the home must be the primary residence. There are no income requirements, and Congress increased the maximum home value that is considered from $417,000 to $625,500, making reverse mortgages available to more homeowners

The loan amount must be great enough to cover an existing mortgage, said Tom Hedderich, owner of Mortgage Network Inc. He saw a spike in reverse mortgages about four years ago when the number of loans his office handled ballooned from only 10 a year to 100.

Borrowers must complete a face-to-face or telephone counseling session as part of the loan process, and credit counselors such as Cynthia Pratt say you should consider all options before deciding on a reverse mortgage because there are costs. Steep loan origination fees and an impact on estate planning are two of them.

While many seniors like their adult children to help with the decision-making, "some will come with their minds already made up," said Pratt, director of counseling and customer service for Momentive Consumer Credit Counseling Services.

"They need to understand what can happen," and that "you are committing the home to a reverse mortgage."

Because the loans are government-insured, they often cost more than regular mortgages. Costs include an origination fee, servicing fee and a mortgage insurance premium, which can be paid using proceeds from the loan. This will decrease the take-home amount.

Borrowers have six months to pay the loan when it becomes due, but they can apply for a six-month extension, said Bob Garczewski, an account executive for MetLife Bank, which has seen its volume of reverse mortgages double in the past three to six months. Heirs are not responsible for paying the loan.

If the only means of paying the loan is selling the home, and the home cannot be sold, the lender would be required to initiate foreclosure proceedings, said Craig Corn, vice president of MetLife Bank.

For Kralik, the benefits of the loan outweigh the costs. The additional income allows her to cover everyday expenses and buy gifts for her grandkids. "It's not a ton of money, but it sure helps me," she said.

Additional Facts ABOUT REVERSE MORTGAGES

What is a reverse mortgage
A loan insured by the Federal Housing Administration that allows borrowers to draw cash from the equity in their home without making monthly payments.

Who qualifies?

You must be at least 62 years old and use the home as your primary residence. Mortgage amounts could range from 50 percent to 85 percent of the home's appraised value. The older you are and the more equity your home has, the more money you are eligible to receive.

What are the benefits of a reverse mortgage?

There are no monthly payments.» Your heirs will not inherit any debt.

What are the costs?

Reverse mortgages can be costly.Generally, your debt increases and your equity decreases. It will reduce the value of your estate.

Common reasons for getting a reverse mortgage:

Eliminate debt or pay off an existing mortgage. Home repairs. Supplement retirement income.