Homeowners Should Examine Reverse Mortgages

  • Playlist
  • Download
  • Embed
    Embed <iframe src="http://www.npr.org/player/embed/103642545/103642518" width="100%" height="290" frameborder="0" scrolling="no">
  • Transcript

The recession has increased the appeal of having older homeowners borrow against their home equity. The loan doesn't have to be repaid until the homeowner dies, moves or sells the home.

RENEE MONTAGNE, host:

Next, we look at a special kind of mortgage designed for older Americans - to be precise, people over the age of 62. Reverse mortgages provide a way to pull cash out of one's home to finance living expenses. They're complex and expensive. But as NPR's Wendy Kaufman reports, some seniors still find them appealing.

WENDY KAUFMAN: Janet and Donald Roth are a delightful couple in their mid 70s. As part of the process of getting a reverse mortgage, they have to meet with a housing counselor. The Ralph's have been careful with money. Their home is paid off. They have not debt. They even have retirement savings. But now Donald's 99-year-old father has to move to a new assisted living facility and will need some financial help.

Mr. DONALD ROTH: And he's developed a little bit of dementia, a little bit of wander-itis. And so they want him to move out and go somewhere. So we have another place and it will take him, but the monthly fee is about 60 percent higher and I need to be sure that I can cover his living expenses for some undefined period of time.

Ms. ANDREA MISIANO (Government Certified Housing Specialist, Consumer Counseling Northwest): Are you an only child?

Ms. JANET ROTH: Yes.

Ms. MISIANO: Are you the only that's stepping up?

Mr. ROTH: Yes, yes.

KAUFMAN: Roth is talking to Andrea Misiano a government certified housing specialist at Consumer Counseling Northwest, a nonprofit group. They're sitting in her office on the ground floor of a suburban Seattle office building.

Ms. MISIANO: And I'm here to pretty much protect you as a consumer. So I'm going to explain your options and explain kind of theoretically how a reverse mortgage works. And we're going to go over, of course, options and all the numbers and consequences of doing a reverse mortgage.

Mr. ROTH: Okay.

KAUFMAN: In a reverse mortgage, you borrow money against the equity in your home. The money can be given out as a lump sum, monthly payments or a line of credit. The loan, plus accrued interest, doesn't have to be paid back until you move out. If you die, your family can pay off the loan, or if they choose not to, the lender will sell the house to pay off the debt. Anything left over would go to your heirs. Misiano tells the Roths that while the loans can be useful, there is a downside.

Ms. MISIANO: It's going to be extremely expensive. The other downside is that there's less to leave your children. But if you're worried about taking care of your dad still, you know, that's still two generations away.

KAUFMAN: The maximum loan is $625,000. Interest rates can vary widely. But ordinarily, they are higher than rates on a traditional mortgage. Moreover, there are sizable fees. In the case of the Roths, who want a $150,000 in cash, the fees will be about $17,000.

Mr. ROTH: Yes, that's very high. But I'm expecting it to last for many years.

KAUFMAN: The retired engineer had done his homework and had considered other options. But Roth wanted the cash without the burden of monthly payments.

Ms. MISIANO: Questions, concerns.

Mr. ROTH: I'm pretty well satisfied.

KAUFMAN: Reverse mortgages have been in use for about 20 years. And historically, they were often linked to unscrupulous lenders, even outright scams. But today, says Meg Burns, a senior official of the Federal Housing Administration, nearly all the loans are government guaranteed and regulated.

Ms. MEG BURNS (Senior Official, Federal Housing Department): We have some caps on fees and charges, and we are constantly looking at the fees and charges that are actually assessed to the consumers. So we're looking at the loan files.

KAUFMAN: Still, some consumer advocates worry that even if the loans themselves are regulated, unscrupulous operators will find a way to exploit seniors, for example, pressuring them to invest the money they get with them. The bottom line, of course, is caveat emptor: let the buyer beware. And in the coming years, there are expected to be more buyers or borrowers. The first wave of baby boomers is now eligible to take out reverse mortgages.

Wendy Kaufman, NPR News, Seattle.

MONTAGNE: There's a Q and A on cashing in with reverse mortgages at our Web site, npr.org.

Copyright © 2009 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.

Q&A: Cashing In With Reverse Mortgages

With credit tight and loans harder to get, older people sometimes look to their homes as a way of cashing out their investment.

Loans known as reverse mortgages allow homeowners 62 and older to borrow against the equity of their home and suspend making monthly principal payments on their homes.

The advantage of such a loan is that it often enables people to stay in their homes, and mortgage payments on the home are suspended until the homeowner dies, moves or sells the home. With investment portfolios down, it can be a necessary way to access money to pay for medical or other bills.

There are downsides, too: It can be costly, because the interest rates are higher than for a traditional mortgage, and because the interest and fees accumulate and must be paid on the back end.

Though no hard figures exist on how many people are getting reverse mortgages, industry experts and brokers say demand for reverse mortgages has increased. So does a reverse mortgage make sense for you or your family? Here are some basic questions that might help answer that question:

What is a reverse mortgage, and who qualifies?

People who are 62 and older and own single-family homes and, in some cases, condominiums or cooperatives, can apply to take a loan against their home. It is a way of taking money out — in a lump sum, a monthly loan or as a credit line — without having to move or make regular loan payments.

Because no monthly mortgage is paid, the amount owed grows over time, particularly since the interest rates tend to run higher than traditional mortgage rates. The earlier you start a reverse mortgage — the younger you are when you start withdrawing equity — the more expensive it is, because you'll have to pay back in the end in terms of interest.

Principal and interest are not paid on the home until the owner dies, moves or sells the home. But the homeowner must continue paying for property tax.

How big a loan can I get, and how much will it cost?

The maximum loan amount has just been raised to $625,000, though the amount individual homeowners can borrow will depend on how much equity they have in the home and how old they are. Older homeowners can get more than younger borrowers.

Interest rates and fees can vary widely. Borrowers are urged to price-shop the entire cost of the transaction before finalizing the deal.

What happens to my regular mortgage payments?

Homeowners stop paying the principal and interest, but must still continue to pay property taxes. The monthly payments are suspended until the owner dies, moves or sells the home.

What if my children or heirs don't want to pay off the loan, and the house is sold by the lender for less than what is owed?

Children or other heirs are given the opportunity to pay off the loan (plus interest) and get the house back. If they choose not to, the lender will likely sell the property to pay off the debt.

Most of the loans currently being written are guaranteed by the Federal Housing Administration (FHA). If the lender sells the house for less than the amount owed, the FHA will cover the difference, so the debt will be retired in full.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.