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Loans > Home Equity
House-rich' elders can get help with cash flow from reverse mortgages
Copyright Associated Press
NEW YORK (AP) _ Many of America's elderly find themselves to be house-rich, but cash-poor.
They make it day to day on Social Security _ and, perhaps, some pension money and a little savings. But most of their wealth is tied up in their home. How can they unlock that money?
A growing number are turning to a product called a reverse mortgage, which allows them to borrow against the equity they've built up in their home while they continue to live there.
"The typical borrower has been about 75 years old, generally a woman and often a widow, whose home is worth more than the average for someone in her circumstances and her income is less," said Ken Scholen, director of AARP's home equity information center.
Such a person generally would seek a reverse mortgage that provides for a monthly payment or line of credit she can draw on as needed, he said.
But other retirees are taking reverse mortgages and using lump- sum proceeds to pay off their existing mortgages or home-equity loans. That eliminates their outstanding debt, along with the need to make monthly loan payments, and frees up their cash for other spending needs.
"In a sense, the home becomes a long-term financial anchor," Scholen said. "In the beginning you build up equity. In your middle years, you borrow against it. And in your later years, you spend it down."
A reverse mortgage is essentially the mirror image of the traditional mortgage. You need to be a homeowner 62 or older to get one.
You generally can borrow between 40 percent and 60 percent of a home's value, depending on your age, and a special counseling session on reverse mortgages is often mandatory. After the contract is signed, the lender makes payments to you _ a lump sum, a monthly amount or a line of credit.
When you eventually sell the house, that money _ plus interest accumulating at a rate of 7 percent or higher _ must be paid back. You or your heirs can keep any leftover equity.
The most popular of the reverse mortgages are insured by the Federal Housing Administration's Home Equity Conversion Mortgage insurance program, known by the acronym HECM. Fannie Mae, a government-chartered corporation, backs larger, more-expensive reverse mortgages called Home Keepers. And "jumbos" are available from private companies such as Financial Freedom Senior Funding Corp. of Irvine, Calif.
Jim Mahoney, chief executive of Financial Freedom, says reverse mortgages can do more than supplement retirement income.
"A lot of people are supporting grandchildren in college," he notes. "Some want to purchase long-term care insurance or life insurance for estate planning purposes."
Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, gives this example for how a reverse mortgage would work for a 75-year-old woman who owns a home.
With a home value of about $220,000, she would qualify for a reverse mortgage of about $142,000, he said. Subtract from that the loan origination fee of 2 percent, servicing costs averaging about $30 a month for about 14 years, insurance, appraisal and other fees, and the woman would net about $127,000.
"Over time, let's say the funds to her and the accrued interest total $200,000," Bell said. "When she sells, that amount is repaid to the lender. She keeps $20,000." Regardless of interest, her maximum liability never exceeds the value of the house.
"The alternative for many of these people is selling their homes, which they don't want to do," Bell said. "Or they have to turn to their families for help or take less-suitable loans."
Information about lenders can be found on the association's Web site, www.reversemortgage.org, or by calling 866-264-4466.
The AARP publishes an excellent guidebook called "Home Made Money _ A Consumer's Guide to Reverse Mortgages" and has a step-by-step study program and calculator on the Internet at www.aarp.org/ revmort/. There's also information there on alternatives to reverse mortgages.
AARP's Scholen says that reverse mortgages "appeal to the self- reliant type" but that not all of them go that route.
"As they go through the counseling process, they learn about all sorts of other possibilities _ perhaps selling and moving, perhaps local grants," he said. "Sometimes, it's the first time the family learns there's a financial issue that needs to be dealt with and they get involved."
End advance for use any time
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Companies:
American Association of Retired Persons (NAICS: 813990, Duns:36-183-7719 )
Dateline: NEW YORK
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