Reverse Mortgage Or HECM

James Simmons loves tending his garden.

On a recent crisp Autumn day, he was busy picking beans, which he would later freeze for the winter. Then, he started turning over the dirt near some of the plants that were still blooming.

“I’ve lived in this house for 37 years,” he explained, pointing out who lived in some of the other property on the block. “I bought that one for my daughter.”

He has no intention to move from his house. But like most seniors, he is always thinking about his finances.

Several years ago, Simmons was approached to get a reverse mortgage on his property. A reverse mortgage gives seniors age 62 and older the opportunity to cash in on the equity in their home.

The reverse mortgage lender gives the homeowner cash in either a lump sum, in monthly payments, or in the form of a home equity line of credit the senior can tap as needed. Unlike a traditional mortgage, nothing is paid back until the home is sold.

At the time, Simmons was told he could get $30,000 in a reverse mortgage on his property. “That didn’t sound like much money to me,” he said, and opted not to get a reverse mortgage.

But as historically-low interest rates have spurred interest in conventional home loans, it has helped dramatically increase the number of seniors who have used reverse mortgage to supplement their decreased income from fixed-income securities and social security.

“Reverse mortgages as we know them today have been around since about 1990,” said Peter Bell, president of the National Reverse Mortgage Lenders Association. “The first couple of years, we did a couple of thousand loans. This year, we’ll probably do 40,000 loans nationwide, about double what the volume was last year.”

Bell attributes the jump in interest partly to the growth of the industry. “As more people have reverse mortgages, it becomes more commonplace for a senior to know of somebody who has one and that creates a greater level of comfort. Our greatest sales force in this industry is our satisfied customers.”

But super-low interest rates coupled with skyrocketing home values means seniors get a lot more money out of their property. How much more? Five years ago, a 62-year old borrower received roughly 38 percent of the value of his or her property. Today, according to Bell, the same borrower would receive nearly 70 percent of the value of the property.

“The older you are, the more cash you can get out of your property,” noted Roger Reynolds, a sales division manager for Wells Fargo’s reverse mortgage business.

That’s why Simmons finally decided to get a reverse mortgage. When he looked into it recently, he found he could get over $100,000 instead of the $30,000 he had been offered a few years earlier.

That kind of cash goes a long way toward improving a senior’s lifestyle, Bell noted. But while supplementing income has always been a top reason for getting a reverse mortgage, Bell said that as interest rates have fallen, a new type of reverse mortgage borrower has emerged.

“Five years ago, the typical reverse mortgage borrower was a widowed female in her late 70s. That’s because her husband would pass away and there would be the loss of one of the two social security incomes. Her household income would be diminished, but her expenses would be the same, so she’d be financially squeezed,” explained Bell.

Today, the typical borrower is a couple in their early-to-mid 70s, and although they could use extra cash, they’re what Bell calls “lifestyle borrowers.”

“They’re people who are generally doing okay but felt they could use additional financing to either enhance their day-to-day living style or create some sort of standby source of cash should they have any financial shocks along the way,” he explained.

“We usually ask somebody, ‘What are you trying to accomplish’ with a reverse mortgage,” said Reynolds. The answer helps the borrower figure out whether to choose the lump sum payment, monthly stipend or line of credit option.

“Sixty percent of our borrowers use the line of credit option. That way they have the flexibility to take anything they want, whether it’s monthly income or cash or anything they need to help themselves or their kids,” Reynolds added.

Simmons said he hasn’t touched his cash yet, but when he does, it will be used to help his grandchildren get through college.

“People are beginning to recognize that the reverse mortgage offers a solution to a lot of the problems that they may be facing on a day-to-day basis,” Bell offered.

Reverse mortgages are also appealing to adult children who are helping their senior parents manage financially. Seniors who can’t quite afford their medical bills or have to choose between putting food on the table and buying the prescription drugs they need often depend on their children for a monthly stipend to make ends meet. A reverse mortgage can help adult children eliminate the need for a monthly subsidy.

As the Baby Boomers start to enter their senior years, Bell and Reynolds see the reverse mortgage business growing rapidly, but warn that few mortgage lenders are actually qualified to do a reverse mortgage. Of 8,000 lenders nationwide, just 300 have experience with reverse mortgage.

To find a qualified reverse mortgage lender, Bell suggests talking to local senior housing counselors to get a referral. Local banks should also know of a qualified reverse mortgage lender. You can also go to the National Reverse Mortgage Lenders Association website (www.reversemortgage.org) for a referral to one of their member.

Educate yourself first: For more information on reverse mortgages, check out the AARP’s website on reverse mortgages (AARP.org/revmort), and the Department of Housing and Urban Development’s site on reverse mortgages (hud.gov/buying/rvrsmort.cfm).

Oct. 29, 2004


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