Reverse Mortgage

Reverse mortgages, most of which are government-insured, let senior homeowners use the equity in their homes; the loans do not have to be repaid until the homeowners move out or die.

"As the baby boomer generation realizes the opportunities these loans afford, it is a perfect time for financial institutions to begin offering these loans," Brad Barber, an executive vice president at Money Line, said Monday in a press release.

Many other seniors find themselves in that fortunate position, and Mr. Pappadakes, president of Excel Mortgage Corp. of Independence, offers a popular service to help them make sure they can afford an active lifestyle beyond retirement age.

With seniors living longer than ever before, reverse mortgages — mortgages in which homeowners borrow money against their residence but retains the deed — are becoming increasingly common, said Mr. Pappadakes, whose firm has marketed these agreements since 1994.

The Federal Housing Administration (FHA) insured an all-time-high 1,800 reverse mortgages during June 2003, the last month for which figures were available, as seniors sought means of tapping into their equity for cash. Those figures helped put the industry on pace to break annual volume records for reverse mortgages by summer's end.

"A lot of Americans are now living into their 80s and even 90s, when they had not expected to live past 75," Mr. Pappadakes said. "And that increased life expectancy changes the way they look at their assets."

Continued low interest rates are drawing some seniors to reverse mortgages, which are set at 150 basis points above the one-year Treasury bill. Now in the 2.8% range, the exact figures are calculated on a monthly basis, said Dennis Hoff, reverse mortgage consultant with Wells Fargo's Woodmere branch. Reverse mortgages must be repaid in full when the homeowner dies, sells the home or moves out of the home permanently.

"Some people use a reverse mortgage to take equity out of their homes and invest it in more lucrative investments," Mr. Hoff said. "That is not the typical senior, but it happens in the case of wealthier seniors. They can pay off mortgages and get a lump sum they can put into high yield bonds or whatever else they select. With interest rates at such a low rate, they are acting not out of desperation but out of financial common sense."

Homeowners who are 62 or older automatically qualify for a reverse mortgage, with no income or credit requirements stipulated, Mr. Hoff said. However, before the deal can be closed, they must pay off any liens or mortgages attached to their residence, owning it free and clear.

In addition, a reserve must be set aside to handle interest payments that come due when the mortgage terminates. Mr. Hoff maintains that reverse mortgages provide flexibility, with clients selecting from different plans or combinations of these plans. Homeowners can receive a lump sum upfront for the total amount of available funds. Or, they can claim a partial lump sum payment and retain the remainder of their money as a line of credit administered by a financial institution.

If mortgage holders live long enough for the amount they receive in periodic payments to surpass the value of their original loan, their estate does not have to repay this excess. In that sense, a reverse mortgage works much as does a pension or annuity, which also rely upon actuarial tables to establish rates, Mr. Hoff said.

Mr. Hoff expects reverse mortgages to become even more commonplace as large financial institutions start marketing them. Wells Fargo took this step during the mid-1990s, and at least two other national firms, Lehman Brothers and Seattle Mortgage, are following its lead.

Even though they are more prevalent, reverse mortgages still have their doubters. Ed Bell, senior managing director of wealth management at the Cleveland-based Gries Financial LLC, is a voice of caution.

"They (reverse mortgages) have a place, depending on the situation," Mr. Bell said. "It all depends on what your long-term goals and plans are with the property. It can limit your options going forward, lowering the amount of value (in your home) that you can leave to your heirs if that is something you are looking to do." However, Mr. Bell said leaving a home to children no longer has the same significance it once did. Often, grown children own homes worth more than their parents'.

Reverse mortgage lenders have begun offering rate locks for the popular, Federal Housing Administration-insured version of their products, their trade group said. The National Reverse Mortgage Lenders Association, which announced the shift Monday, said it had developed a model disclosure for lenders.

Seniors use reverse mortgages to tap home equity in lump sums, credit lines, or regular payments. The money does not have to be repaid until the homeowner moves or dies. The lock, which is already being used, is called a "principal limit lock." This is because by freezing the expected interest rate on the adjustable-rate loans before an origination, the lock sets in place how much money a borrower is allowed to tap. Without a lock, the rate moves with the 10-Year U.S. Constant Maturity Treasury index, which the Federal Reverse Board publishes weekly, changing the maximum amount a senior can borrow.

(Borrower age, available equity, and loan limits are other key factors in that calculation. After origination, the rate moves at a margin above the index; the FHA covers any shortfall if a home sells for less than the funds borrowed and accrued interest.) The lock can last for up to 60 days after an application, the group said. If rates fall, borrowers can receive more money than originally offered. The group said that the specifics of the locks were approved by the Department of Housing and Urban Development -- which issued regulations in 2003 permitting them -- and Fannie Mae, the loans' biggest investor. Eighty percent of reverse mortgages are FHA-insured "Home Equity Conversion Mortgages" that are eligible for the lock, the group said.