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Mortgage options ease burdens 'Reverse mortgages'
still new enough for misconceptions

By David Morrill, BUSINESS WRITER, Tuesday, January 13, 2004

FOR MARALYN KILPATRICK, the financial burden placed on her was nearly unbearable. The 69-year-old had a $30,000 credit card debt, $106,000 left to be paid on her home, and her husband, Wayne, had medical issues that threatened costly consequences at any given moment.

"It was becoming very stressful and a huge burden that I thought about daily," said Maralyn. "No matter how much I worked, I felt like I would never be able to overcome my financial situation."

Just when they thought the situation was hopeless, the Kilpatricks found a financial option on the Internet that they had known little about.

What they found was the reverse mortgage, and it changed their lives.

A reverse mortgage is a unique loan that enables senior homeowners to convert part of the equity in their homes into income without having to sell the home, give up the title or take on monthly mortgage payments. It is available to individuals 62 or older who own a home that is established as their primary residence.

The loan can be taken monthly, in a lump sum or through a line of credit. Funds obtained from the reverse mortgage are tax-free.

"I think it's just a wonderful program because it can turn somebody from completely sick with worry to financially stable overnight," said Maggie O'Connell, Seattle Mortgage Co. "People are so worried that this is a scam that they don't even take the time to understand what it's about."

The three primary reverse mortgage specialists serving the Bay Area are Seattle Mortgage, Wells Fargo, and Reverse Mortgages of California, a division of Financial Freedom.

About 90 percent of all reverse mortgages fall under the federally insured Home Equity Conversion Mortgage (HECM). Other types of reverse mortgages are the Fannie Mae Home Keeper loan and a product called Cash Account, a reverse mortgage for higher-value houses.

The loan is not dependent on a credit check. But if you owe more on the house than the maximum amount you can receive from the reverse mortgage, then you may not be eligible for the loan. When calculating loans and equity, HECM sets a cap of $290,319 for the home's value, even if it's worth twice that much. The cap on the home's value for Fannie Mae reverse mortgages is $333,700, but the interest rates are higher than HECM.

"Of all the things I've been involved with, this is the one product that has absolutely no disadvantage to it," said Larry Thompson, manager of Reverse Mortgage Wells Fargo. "Unfortunately, of the people who are eligible, we would estimate that less than 1 percent have actually done it."

The amount of the loan depends on how old the person is and how much their house is worth. The older a person is, the more they will receive, based on the home's value, but the program requires they pay off existing loans.

For example, in the Bay Area a 65-year-old person whose home is valued at the cap of $290,319 would receive about $146,000, under HECM program. An 85-year-old would receive about $200,000 for the same home under HECM. The amount would be less for Fannie Mae reverse mortgages.

The Kilpatricks, who worked with Seattle Mortgage, received enough to pay off the balance owed on their home, erase their credit card debt, buy a new Mazda van and have $15,000 left over.

"It was a godsend," Maralyn said. "It felt like a huge monkey had been lifted off my back."

In Oakland, the Rev. James Rice, 81, said that a reverse mortgage was a blessing because it kept him from being a financial burden to his children.

"I feel more equipped with the reverse mortgage," he said. "Right now I don't think about my financial situation at all."

The loan becomes repayable when the borrower sells the home, permanently moves out or dies. During the life of the loan no mortgage payments are due but interest accrues until the loan is paid back, increasing the amount to be paid back as time passes.

One misconception of reverse mortgage is that the bank or mortgage company becomes co-owner of the house when the loan is given. Instead, the ownership always remains with the senior until he no longer lives there. The homeowners equity in the house is reduced by the amount of the loan and accumulating interest.

Heirs to the home have the option of selling the house, refinancing it or paying the loan back.

"The two categories of seniors that use reverse mortgage are the ones that already have a good life and want to make it a plush life, and those who really need help because they don't know whether to spend the limited amount of Social Security they get on food or medicine," Thompson said.