Couples who live longer than expected will not see their monthly reverse mortgage payments stop if their housing values decline, thanks to federal insurance built into the cost of the loan that guarantees payments. An article on reverse mortgages Aug. 21 in the Real Estate section about disbursements was unclear.
ST. LOUIS - Oliver Dusin, 82, was at his wits' end late last year, staring at a future where he and his 79-year-old wife, Yvonne, would lose their home in Affton, Mo.
Inflation had pushed prices to the point that their Social Security and pension couldn't keep up with their expenses.
"There was more going out than coming in," Dusin said. "We decided we would have to leave the house and move into a [nursing] home, which neither of us wanted to do."
But the Dusins are still in their home, the beneficiaries of what he calls a "godsend." Mortgage bankers call it a reverse mortgage.
Despite being around for more than two decades, reverse mortgages are little-known tools that can help older people stay in their homes as bills mount and incomes stagnate.
They're also little understood, with a too-good-to-be true aspect that invites skepticism. Available only to people 62 or older, reverse mortgages let homeowners turn what is likely their biggest asset, a house, into a cash machine.
Under a traditional mortgage, a homeowner gets a loan and sends a monthly mortgage check to a lender. Under a reverse mortgage, a lender typically sends a monthly check to homeowners.
"It comes into play when you're an elderly person who needs cash flow," said Jim Blair, a principal at Moneta Group, a financial planning firm in Clayton, Mo. "It's the last pile of equity. ... It can be a life saver."
When the owners die or the home is sold, the bank collects the principal that it paid to the homeowners, plus interest.
"Our research tells us the vast majority of people want to stay in their homes and never leave," said Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation. "A reverse mortgage is an important tool that seniors can look into to do that."
But most seniors don't give them a second thought.
A recent study by the National Council on the Aging estimates that the most popular reverse mortgage program has been used by only about 100,000 households since 1989.
The study estimates that more than 13.2 million households are candidates for a reverse mortgage, and $953 billion would be available.
The council identified medical costs as the most urgent financial issue that could be at least partially resolved through reverse mortgages.
Nearly 10 million senior households face health problems. About $700 billion would be available to those seniors.
"Almost all of my clients had a health care issue or an expense issue because they ran their credit cards up so high to pay for prescription drugs," said Bob Lane, a mortgage banker at Paramount Mortgage Co. in Creve Coeur, Mo.
Because the market is so small, most lenders shun it.
Indeed, a single California firm, Financial Freedom, has captured more than 50 percent of the reverse mortgage market nationally. In 2004, it closed nearly 20,000 reverse mortgage loans.
That represents a 44 percent increase over 2003, but it's still a tiny fraction of the potential market, said Bart Johnson, the company's chief operating officer.
"Overcoming misconceptions is our core job," Johnson said. "People still think they give their home away."
Until she received a promotional letter early this year, "I never heard of a reverse mortgage," said Ida Hill, 70, of Richmond Heights, Mo.
In a few weeks, Hill became educated, then a customer and is now an advocate.
Unlike most reverse mortgage borrowers, Hill does not receive a monthly check. Instead, she used the reverse mortgage to wipe out her monthly mortgage payment.
As a result, she and her husband, Willie, 72, have about $10,000 a year to spend on the day-to-day living expenses that had swamped them.
More importantly, they will be able to stay in their home, Ida Hill said.
"I was on the verge of a nervous breakdown," she said. "I didn't want to move to a senior citizen home."
But reverse mortgages aren't for everybody.
For starters, only homeowners with a lot of equity in their houses are candidates. Ideally, the homes would be mortgage-free.
A financial planner offered a warning about the complexity of the reverse mortgages.
"There are enough details in those things that I think it definitely is a 'consumer beware' thing," said Eric Park, president of Steamboat Financial Group in Washington. "The miracle of compounding is working against you."
Reverse mortgages have safeguards that prevent the loan from building higher than the equity in a home. But if elderly couples live long enough, and housing values decline, their monthly checks could run out.
"If you run out of equity, what happens?" Park said.
Getting a reverse mortgage is similar in scope and in cost to getting a traditional mortgage. All the usual inspections apply and a home appraisal must be conducted.
Because they are relatively expensive, reverse mortgages don't make sense for anyone who needs a small sum of money. In those cases, lenders recommend home equity lines of credit instead.
For many seniors, the biggest concern is that reverse mortgages reduce the equity in a home. When homeowners die, they literally will have less house to pass on to their heirs.
Ida Hill said she isn't worried about that. The equity in her home is rising faster than the accrued interest.
Besides, she and her children are happy that their immediate financial problems are resolved.
"Me and my husband, we've never been so happy in our lives," she said. "All I think about is me not paying the mortgage every month."
Tips on reversing a mortgage
What is a reverse mortgage? It allows homeowners 62 or older to draw money from the equity in their homes. Typically, the funds are disbursed from a lender over a multiyear period and paid back when the home is sold.
Who are good candidates? Homeowners with a large amount of equity who are having long-term cash-flow problems.
Who are bad candidates? Anyone needing a small sum of money, or those who have very little home equity.
Where can I get more information? AARP Foundation offers reverse mortgage counseling in a 46-page booklet that can be ordered from its Web site: http://www.aarp.org/money/revmort/. Click on "Free Guide."
The National Reverse Mortgage Lenders Association's Web site has information, lists of lenders and calculators: http://www.reversemortgage.org/. A booklet can be ordered by calling 1-866-264-4466.