Tuesday, January 23, 2007 / CHRISTINE DUNN (The Providence Journal)
BRISTOL, R.I. -- In 1964, Alexander Paiva paid $18,500 for his ranch-style house in Bristol, R.I. More than 40 years later, the property has an appraised value of $285,000.
Paiva, 64, retired last summer from his job as service manager at an automobile transmission shop. Some of his retirement benefits won't be available until he turns 65 this year.
To help tide him over, and to pay for a few extras, Paiva has tapped the equity of his home with an increasingly popular financial tool for the elderly: a reverse-mortgage loan. With these loans, an elderly homeowner who wishes to continue living at home can get access to money that doesn't have to be repaid until he or she sells the house or dies.
The upfront costs of the loans are high, and they are not recommended for those planning to sell their house in the near future. Paiva's closing costs were $13,325, which included a payment of $5,760 for mortgage insurance from the U.S. Department of Housing and Urban Development's Federal Housing Administration. FHA insures an estimated 90 percent of reverse-mortgage loans issued in the United States. Most borrowers roll over the loan costs into their balance to keep their initial outlay of cash to a minimum, according to Chris Barnett, a spokesman for Rhode Island Housing.
Bill White, president of Ocean State Reverse Financing Inc., who worked with Paiva, said the loan insurance cost is 2 percent of the appraised value of the house. It protects the lender, but also guarantees that the "heirs or borrowers will never have to pay (the lender) more than the house is worth," he said. Without the insurance, he said, the interest rates for reverse mortgages would be higher than they are.
In the past week, interest rates for reverse mortgages were 6.5 percent for a monthly adjustable rate and about 8.25 percent for a rate that is adjusted annually, White said, and the loans have lifetime rate caps.
Borrowers have the option of taking their payments in a lump sum, as a line of credit, or in regular monthly payments.
To be eligible for a HUD-insured reverse mortgage, borrowers must be at least 62 years old. The amount that can be loaned depends on the borrower's age, the amount of equity, and the interest rates. Loans insured by the government cannot exceed a certain limit (currently $362,000, according to Peter Bell, president of the National Mortgage Lenders Association), even if the value of the house is much higher. Uninsured loans are offered at higher amounts, and at higher costs.
In the fiscal year that ended Sept. 30, 2006, 76,351 federally insured reverse mortgages, also known as home-equity conversion mortgages, were issued, up 77 percent from the previous fiscal year, White said. As the baby-boom generation begins to retire, the numbers are expected to grow.
Increased competition may eventually help drive down the high costs of reverse mortgages, according to Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. "We're just starting to see some competition," Scholen said. Until recently, "there was only one funder, Fannie Mae, and only one insurer, HUD, and we really haven't seen much competition on the fees. It's starting to change."
Loans sold on Wall Street recently got a better price than Fannie Mae has been paying, and HUD is looking into options for reducing origination and insurance costs, he said.
Scholen said he advises seniors considering reverse mortgages to wait, if they can. "If they ... don't have a really urgent need to do this now, they would be smart to wait until prices come down and they have more choices," he said.
Scholen said many seniors would like the option to "borrow less and pay less" with reverse mortgages.
"It's good advice in general to wait," Scholen added, because "the older you are when you take it out, the more you can (borrow)."
He said he also advises seniors considering reverse mortgages to seriously research the option of selling their house and moving. Some seniors find to their surprise that new housing better fits their current needs, while for others, the process makes them more sure that they want to remain in their longtime home and "age in place."
"In either case, you come back with a better idea" of what you are buying when you take out a reverse mortgage, Scholen said. "You're buying the ability to stay in that home."
(Distributed by Scripps Howard News Service, www.shns.com.)
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