More retired homeowners choosing reverse mortgages

By Adam Geller
Associated Press

When Koula Chumley and her husband paid $25,000 for a four-bedroom split-level 35 years ago, it was an investment in family. But Chumley's children have families of their own now, she's widowed and is counting on that same house — worth much more — to ease life in retirement.

"I thought now is the time," said Chumley, who is 78, and is using the arrangement to pay off the remainder of the old mortgage on her Odenton, Md., home, help with monthly bills, update a bathroom and make plans for travel to Europe. "So far, so good. Life is good, and I hope to stay healthy to enjoy some of it."

Reverse mortgages are still largely unknown to many seniors, but they are gaining in popularity. And lenders are eyeing the potential for an even larger market as millions of baby boomers, less skeptical than their parents about relying on debt, approach their 60s.

The number of federally insured reverse mortgages has risen from fewer than 8,200 in 2001 to 21,600 last year. At the current pace, the number should almost double this year to nearly 40,000, industry executives estimate.

Reverse mortgages can be difficult to understand, and the arrangements vary widely. But all stem from Congress' 1987 vote to start a government-backed loan program to let older homeowners more easily tap the equity in their homes. Borrowers must be 62 to participate.

Private lenders structure the loans almost like annuities — estimating how long a person is likely to live in their homes to calculate how much cash a homeowner can obtain and how much of the home's equity must be reserved as interest. When the homeowner moves out, the borrowed principal and interest must be repaid.

The loans are not for everyone. They require borrowers to shoulder substantial fees, which are not always readily visible since they're built into the loan itself. The amount of cash available to homeowners can also vary greatly, depending on their age, value of their home, where they live and interest rates.

But with careful consideration and advice from a counselor — a free service — they can be quite valuable and their appeal to homeowners is broadening, consumer advocates say.

"These loans can really dramatically improve the quality of life for many, many people," said Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation, the tax-exempt affiliate of the advocacy group for older Americans. "But they need to go into the transaction with their eyes wide open."

Federally insured reverse mortgages, which account for the overwhelming share of the market, have been around since 1989. But they've taken a long time to catch on among a senior population wary of being scammed, fearful that such a loan might mean forfeiting their homes, and reluctant to depend too much on borrowed cash.

That has started to change, though, partly because of positive word-of-mouth among seniors, and with the economic uncertainties of the past few years providing strong incentives.

Most homeowners who secure a reverse mortgage take it in the form of a credit line, with only about one in 10 also choosing to draw a monthly advance. In theory, a homeowner who lives much longer than expected and stays in the home could pocket payments exceeding the value of the home. Even in such a case, the homeowner keeps the home. But when the owner dies or moves, there would be no remaining equity left in the home, and the loan would be satisfied when it was sold.