Reverse mortgages can be a good decision, if done correctly

By Tim Simard
Observer staff

Ann Sullivan, 65, of Panton lives in a large farmhouse set amongst the rural countryside. The property has been occupied, in one form or another, by family members since the 1800s. Sullivan recently realized that she might not be able to hold onto it.

Her ex-husband, whom she remained good friends with, recently passed away and her five grown children no longer live in the house. As a part-time teacher at Vergennes High School, she wanted to consider full-time retirement, but was unsure if it was a realistic possibility.

"I lacked the finances and realized I didn't have the funds to cover debts," Sullivan said.

Sullivan noticed advertisements about the possibility of getting a reverse mortgage.

"I liked how I could stay in my home and not have to pay for it," she said. "I don't want to have to worry about extra bills, either."

A reverse mortgage is a home equity loan that allows the homeowner to borrow against its value. It's a popular option for many people over the age of 62, the required age minimum, because it provides an immediate access to cash. The older a borrower is, the more money he or she will receive. Credit history and income levels aren't taken into account since the loan is based on the value of the home.

The loan does not need to be paid back until the owner sells the home, moves away or dies. The "home" eventually repays the loan, along with all interest fees, once the estate is sold.

Reverse mortgages have been around for 20 years, but recently have become very popular, with more financial firms advertising the option. Sullivan recently called Scott Funk of Mortgage Financial during her initial research stages. Funk, known as the "Reverse Mortgage Guy" in Vermont, specializes only in reverse mortgages. He works out of his home in Richmond, but travels all over the state for consultations.

"The whole point of (a reverse mortgage) is to keep people in their homes," Funk said. "It's better for everybody."

According to Funk, who serves on the Aging in Place Council, a reverse mortgage can be a good financial move for someone like Sullivan.

"People usually do it for two reasons," Funk said. "They're in some sort of financial crisis or they're looking towards the future."

In a crisis, individuals may choose the reverse mortgage option because it's a quick and safe fix.

"It bails them out," Funk said. "It helps them pay old bills and pay their taxes. In what I do, I try to get the wolf out of the kitchen and off down the street."

Sullivan was not in a crisis, but she was looking towards the future. She was in the correct age requirement, over 62 years old, and wanted to continue to live in her house without the stress of bills. She also liked the idea of passing the house along to her children in the future.

Regarding the fact that the loan ends once it's paid off, Sullivan said, "There are exits if one of my sons wants to buy the house."

Borrowers can take the loan as a lump sum, or put the money into a line of credit, where the potential for a growth rate exists, said Funk.

But there are downsides. Getting a reverse mortgage can be very expensive. One of the more popular reverse mortgages, the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA), charges a 2 percent insurance premium and a 2 percent origination fee on top of closing costs. Total fees and costs on a $200,000 home can sometimes exceed $11,000.

"A lot of reasons some people don't like a reverse mortgage is because costs are high and people are averse to being in debt," Funk said, adding that reverse mortgages are the only loans where all expenses must be shown to the applicant before borrowing.

Reverse mortgages and annuities

In December 2007, the Senate Committee on Aging held hearings about reverse mortgages and how they could be improved to better serve the nation's senior community. One point the committee spoke about was related to using reverse mortgages to purchase annuities. An annuity is a monthly cash advance for life from an insurance company.

"When used properly, reverse mortgages can be an effective way for seniors to tap into the equity of their house as a means to bolster their retirement security," Sen. Herb Kohl, D-Wis., chairman of the committee, said at a meeting on Dec. 12, adding "long-term annuities are almost always inappropriate for seniors, as they can tie up retirement savings far beyond one's life expectancy."

John Olmstead, an FHA representative based in Burlington, agrees that reverse mortgages and annuities don't always work well together.

"If you were to get a reverse mortgage and take the proceeds and put it into an annuity, then you'd have to pay the annuity fee," he said. "You're essentially paying a fee twice."

Olmstead is an FHA-certified financial counselor. By law, a potential borrower has to speak to a third party, like Olmstead, if he or she is looking to get a reverse mortgage. This was put into place as a safeguard.

"As a counselor, I try to present the information as clean as I can," he said.

Olmstead said people feel they need to get an annuity as well as a reverse mortgage because they believe they'll get a better investment with an annuity than what a reverse mortgage line of credit might give. It also has to do with assets.

"Once you have an annuity, it's an asset in your name," Olmstead said. "A reverse mortgage is your money, but not an asset in your name."

Being aware

Many of the recent congressional hearings focused on questionable practices by lenders to attract new customers to reverse mortgages, especially the new baby boomer generation that is entering the required age bracket.

According to Sen. Gordon Smith, R-Ore., a ranking member of the Senate Committee on Aging, reverse mortgages have seen rapid growth due to the growing numbers of Americans getting older. Speaking at the Dec. 12 meeting, Sen. Smith said that in 1990, the FHA only issued 157 reverse mortgages. In 2007, 107,000 were issued – an increase of 68,000 percent in the last 17 years.

"However, as this rapid growth continues, so grows our responsibility to properly inform and prepare senior homeowners for what could potentially be a marketplace ripe for inappropriate products and downright fraudulent brokers," Sen. Smith said.

Funk agreed that people should make sure to be comfortable about whom they are dealing with before getting a reverse mortgage. He said that getting the loan should not be done over the phone or by mail, but face-to-face. Individuals shouldn't be rushed, either.

"It should be that there's lots of time to make decisions," Funk said.

Funk also suggested that people check references to make sure the broker is legitimate.

Sullivan said her experience getting the reverse mortgage was incredibly easy and that she was happy her children could be involved. It was an easier process than she thought it would be, and recommends people explore it as an option.

"For me, I think it's going to be ideal," Sullivan said. "It was the answer I needed at the time I needed it."