When investment returns on certificates of deposit began to fall into the basement, Barbara Houskeeper’s finances began to look grim. She had become seriously ill. And though she was far from destitute, the elderly widow began to wonder whether she would have to sell her home-or even depend on her children-to handle rising medical expenses.
But that changed recently when Houskeeper secured a reverse mortgage. Now she’s getting payments of $2,000 a month, which cover her “scary expenses” with a bit left over.
“I never wanted to be a burden on my kids,” she said. “And I won’t be.”
Houskeeper is among a growing number of senior citizens who have turned to reverse mortgages in recent years as a way to cope with longer life expectancies, declining investment returns and rising expenses. These loans, which can pay you monthly income for life, are a way to tap home equity without having to move.
Illinois has permitted reverse mortgages since Jan. 1, 1992, though according to the AARP there are still only two lenders in the Chicago area who offer the loans: Chicago-based Senior Income Reverse Mortgage Corp. and WestAmerica Mortgage Co. of Oakbrook Terrace.
More Top Picks Best Blackout Blinds For Light Sensitivity
Steven Baer, president of Senior Income Reverse Mortgage, says his company is finding “an immense variety” of circumstances that are triggering an increase in reverse mortgages.
Typically, senior citizens in the Chicago area who apply for the loans are in a cash crunch because of high property taxes or credit card debt, he says. Sometimes they simply have difficulty making a regular mortgage payment since their income dropped in retirement.
“A quite common reason for looking into this is because of health-care expenses,” he said. “We had a couple in Franklin Park that was paying a hundred dollars a month in heart medication, and it was just too much for them. The reverse mortgage became the means for them to make ends meet.”
Another category includes seniors who may have no problem meeting month-to-month expenses, but they want to do some fun things in their retirement years, such as go on a cruise. “They don’t have the means to do it, or else they are afraid of touching their nest egg to enjoy their retirement,” Baer said.
And now as increasing numbers of Americans find themselves alive and healthy long after their retirement funds are exhausted, reverse mortgages seem destined to swell even more.
In the first eight months of 1992, the American Association of Retired Persons received some 16,000 requests for information about reverse mortgages compared to just 14,000 such requests in all of 1991, said Bronwyn Belling, an AARP housing specialist. In the last three years, the number of reverse mortgages actually written has more than tripled, added Ken Schoen, director of the National Center for Home Equity Conversion.
Yet even the biggest advocates of reverse mortgages note that they can have serious drawbacks, ranging from high fees and expenses to the possibility that seniors who take out certain “term” loans still may be forced to move.
In addition, the loans remain inaccessible in many parts of the country. There are no reverse mortgage lenders in Arkansas, Louisiana, Mississippi, Oklahoma, North Dakota, South Dakota, Tennessee, Texas, West Virginia or Wisconsin, according to AARP. And several other states have only one bank, thrift or finance company willing to make the loans.
The product, a hybrid created in the early 1980s, is also frequently misunderstood. Reverse mortgages work just like a regular mortgage. But instead of getting a lump sum that you must immediately start paying off, you usually get monthly payments that needn’t be repaid until the end of the loan term. Principal and interest charges simply accumulate until the loan is due. Often repayment is triggered only at the borrower’s death.
Reverse mortgages are generally available only to those over the age of 62, but they are not federally subsidized loans with below-market rates and terms, said Judy Gaither, housing director at the Human Investment Project in San Mateo, Calif. Indeed, they frequently cost significantly more than regular mortgages. Seniors need to shop carefully to avoid fees and charges that can often add up to tens of thousands of dollars.
Nonetheless, for cash-poor, home equity-rich seniors, reverse mortgages can be a key to a more comfortable retirement.
They come in three varieties:
– There’s a tenure loan that works like an annuity, paying you a set amount each month for as long as you live in the house.
– There’s a line of credit, somewhat like a credit card. You have a set amount available that you can use at any time. But once you hit the limit, you’re out of cash.
– And there’s a term loan that pays you a fixed amount for a set period of time. The shorter the time frame, the more you get monthly.
Some reverse mortgages are federally insured, some are privately insured, and others are not insured at all. You pay a premium for the insurance coverage.
How much can you get? That depends on how much the house is worth, the kind of loan you choose, the interest rate and your age.