Published March 2003

Reverse mortgage a financing option for seniors

When they retired 10 years ago, they had a comfortable income, a modest nest egg and they owned their own home free and clear. Life was good. At 62, Bob and Edith of Everett had plenty of time to enjoy retirement.

Ten years later, inflation had eroded the purchasing power of their fixed income. Couple this with low interest rates, a disappointing stock market and rising medical costs, and their savings and investments were soon depleted. Now at age 72, their income barely met their basic fixed costs. Their home needed a new roof. They could no longer afford to travel to see their family.

Bob and Edith’s story is typical of many retired Americans who are finding their golden years difficult financially.

Enter the reverse mortgage.

“A reverse mortgage is the perfect solution for many senior homeowners,” says Jerry Dawson, a reverse mortgage specialist with Frontier Bank in Everett.

Reverse mortgages are loans that enable homeowners age 62 and older to convert part of the equity in their home into tax-free income. A loan is taken out against the equity of the home, and the lender pays the homeowner a monthly income or lump sum, allowing for the interest balance to accrue until such time as the last surviving borrower dies, sells the home or moves out permanently. With rates so low today, the amount available from a reverse mortgage is very attractive and is stimulating a surge of activity.

Borrowers can take the money in several different ways, such as a line of credit and/or monthly income guaranteed for life. And the money can be used for any purpose.

For Bob and Edith, a reverse mortgage on their $225,000 home provided $10,000 in cash to pay for a new roof, $500 of monthly income guaranteed for both of their lives and a $51,500 line of credit that can be used for any purpose.

They no longer have to be concerned about meeting their budget. Not only were they able to pay for needed home repairs, but now they are also looking forward to traveling again to see their kids and grandkids.

“It changed their lives dramatically,” according to Dawson.

Freeing up otherwise illiquid equity in their home to use for their immediate needs is usually the purpose, “although, I’ve also had a few clients use the proceeds to purchase a piece of vacation property or to go on a once-in-a-lifetime trip,” says Dawson. “... They worked hard all their lives to pay for their home. It’s up to them what they do with the cash they access using a reverse mortgage.”

How large a reverse mortgage can be is determined by several factors, including the person’s age at the time of application (62 is the minimum, but the older you are the more you qualify for), the value and location of the home, the type of reverse mortgage and payment option selected, and the current level of interest rates.

Because a reverse mortgage can help their parents live independently, adult children benefit by concentrating their resources on their own families and not worrying about having to sell the family home just to support Mom and Dad. Often, a reverse mortgage provides more than cash. It restores independence and dignity by allowing seniors to regain control of their financial lives.

When the reverse mortgage comes due, the amount owed can never exceed the current value of the home. If there is any remaining equity, that goes to the borrower or to the borrower’s heirs. Often, appreciation on the property offsets the increase in the loan balance, so the owner’s equity position can stabilize or even continue to grow.

Reverse mortgages have seen a sharp rise in loan volume. In the 12-month period ending Sept. 30, the volume of federally insured reverse mortgages made nationwide rose by 68 percent from the prior fiscal year (to 13,049 loans), accounting for more than 20 percent of all volume since 1990.

“I love what I do,” says Dawson. “The reverse mortgage is helping many seniors realize their retirement expectations and live a financially independent lifestyle in their golden years.”

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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