Drawing down equity on home frees assets, carries downside ris

Drawing down equity on home frees assets, carries downside risk
By Tim Simmers, Business Writer
Article Last Updated: 04/20/2007 06:09:41 AM PDT

BEFORE GETTING a reverse mortgage, Jo Ann Miller and her husband, Carl, were living modestly on Social Security and carefully watching their spending. They had no pensions to fall back on and weren't able to save much while they were working. But they had equity in their San Mateo townhouse. Since the Millers obtained a reverse mortgage, which allows them to draw money from the equity in their home, they feel like they have some breathing room to live better. With the extra money, they bought a hybrid car they wanted in order to help the environment, and they're extremely excited about a monthlong vacation they're taking this summer to Australia. "We were down to a pretty low amount of annual income," said Jo Ann Miller, 65, who spent much of her working years as a secretary. "We're not into a lot of materialistic things. We just wanted a way to cut our costs and travel." For most senior homeowners, the equity in their home is their primary asset. For some, that equity is what they'll pass on to their children. Others, however, see the equity as their money in the bank.
Reverse mortgages allow people 62 or older to draw down the equity on their homes. They can take set monthly payments of $1,000 or $1,500, or whatever they deem necessary, or a lump sum. A lot depends on the specific loan, and not all reverse mortgages are the same, counselors say. There are both critics and advocates of the loans, which often carry high closing costs.
But with a population living longer and baby boomers turning 60 by the thousands each day, reverse mortgages are becoming a fast-growing trend. It's a way of supplementing retirement, paying for steep medical costs or in-house care, or simply cutting costs and traveling, as was the case with Jo Ann Miller. She now has access to a large chunk of money (about $100,000) from the equity in her townhouse that's valued at about $550,000. She and her husband have three children among them, but the children aren't dependent on a big inheritance, she added.
So they went ahead with the reverse mortgage to live a little better.

Closing costs
The only stickler, Jo Ann Miller said, was the $17,500 in closing costs. "That's kind of expensive," she said. That appears to be the going rate for closing costs, so be aware of that if you're considering a reverse mortgage. Still, for many people, such as widows who never dealt with family finances, or seniors who are running out of money and need access to cash, the reverse mortgage can make sense. "Sometimes it's done for need and sometimes for choice," said Judy Schwartz, co-owner of Reverse Mortgages Only in San Carlos. "You give people the choice to access equity on their home, but you do build a debt on the property." As a purveyor of such loans, Schwartz tries to understand "what the family's needs are." She stresses that ownership of the property does not change hands, and the title of the property remains with the homeowners. The formula for determining how much you can draw from your house is based on the fair market value of your home, your age and amount of equity in the home.
The younger you are, the less money you have access to. In government loans of the kind obtained through the Federal Housing Administration/U.S. Department of Housing and Urban Development (HUD), there's a lending limit of $362,790. The interest rate is based on the one-year Treasury bill, plus 1 percentage point (currently 6.01 percent). Counseling is mandatory for seniors getting these loans through the government. That way they know going in about varying interest rates and high closing costs, which people sometimes don't notice because it comes out of the equity of their home.

No free money
For many people taking a reverse mortgage, a key consideration is that by the time a child or heir is to inherit the house, the debt could be too high to pay off, forcing a sale of the property.
"There's no such thing as free money," said Cherisse Baptiste, a reverse mortgage counselor for Echo Housing in Hayward. "People have to understand what's involved." Besides high closing costs and the impact on children or heirs, Baptiste stressed that you also need to make sure you know what the interest rate is that compounds daily on what you owe, and that reverse mortgages involve a rising debt that eventually must be paid out of your equity.
That often means selling the home to pay off the debt, or your heirs selling it after you pass away. "What is left over for your heirs might not be as much as you expected because of higher interest rates and closing costs," Baptiste said.

Getting advice
Eleanor Curry, 79, a retired communications specialist, said the key to getting a successful reverse mortgage is working with the right advisers. "You have to have people you can trust, and they have to make it very clear what you're doing," said Curry, who took a lump sum from her San Carlos home. She praised her advisers, Judy Schwartz and her partner John Edwards at Reverse Mortgages Only. "I'm awestruck," said Curry, about the reverse mortgage she just obtained. Curry and her husband, Richmond, have eight children, 23 grandchildren and 15 great-grandchildren, "but they are well taken care of and aren't dependent on an inheritance," she said. "It's our money, and we can do whatever we dreamed about now, like traveling, repairing the house, going back to school," she said. "I'm completely relaxed now."
Still, critics of the loans warn seniors, especially older ones, of the high "front-end costs" of the loans, and point out that there are alternatives. Those might be home-equity lines of credit, taking in roommates or selling the house and moving to get access to money.
Seeing a counselor about alternatives is advised. "The basic problem from a consumer's perspective is that unless you are in your late 60s and in good health, it is a very poor investment because all the costs are front-loaded," said Niall McCarthy, an attorney and partner at Cotchett, Pitre & McCarthy in Burlingame.


Winning refunds
The group has done multiple class-action lawsuits against reverse mortgage lenders and was able to refund millions of dollars to senior citizens. However, advocates of the loans say the market has matured, and they say reverse mortgages are good for certain people.
"Reverse mortgages can make a great deal of sense, as long as the fees are reasonable," said Allen Cymrot, investment adviser and founder of http://www.netgainrealestate.com, a Mountain View-based Web site for income property investors. "(Reverse mortgages) serve a need, but they're not for everybody. You've got to understand what you're getting into."