Reverse mortgage activity grows as seniors live longer

By LISA HAARLANDER
The Buffalo News Business Reporter
8/15/2004

When Italo Palumbo's monthly pension income was unexpectedly cut, he and his wife, Virginia, didn't know how to make ends meet.

So the couple turned to their biggest asset - a home they bought 18 years ago in the Town of Lancaster.

They were able to get money out of the house with a tool called a reverse mortgage - a loan against the equity in their home.

"It was a life saver," said Italo Palumbo, 81, a retired carpenter. "We're holding our head above water. It kept us from going to the poor house and losing everything."

Nationally, there's been a 127 percent increase in the number of people getting reverse mortgages in the last year. Locally, M&T Bank has seen a 150 percent increase, although reverse mortgages remain a little known option for seniors.

HomeChex in Rochester, one of the largest reverse mortgage lenders in the state, is also seeing huge increases in applications. It estimates it will make several hundred reverse mortgages across upstate New York this year.

"A misconception is that reverse mortgages are for someone who is desperate," said Mark Browning, president of HomeChex. "That's probably less than 20 percent of our clients. Most often they are looking to a reverse mortgage as a matter of lifestyle as opposed to a matter of immediate need."

M&T recalls one couple who used the proceeds from a reverse mortgage to buy motorcycles to cruise around the country.

Low interest rates and seniors living longer are driving the increased demand for reverse mortgages.

"With interest rates and returns being what they are, people are looking for other alternatives," said Nicholas Buscaglia, administrative vice president of M&T Mortgage Corp. "A reverse mortgage is a way to complement their financial situation and allow them to do the single most important thing - to stay in their own home."

There are a number of misconceptions surrounding reverse mortgages, which became a permanent government program in 1998. So far, lenders have made 23,000 reverse mortgages this year compared with 10,000 at the same time last year.

"In the scheme of things, it's still a fledgling program," said Buscaglia, who is also on the board of directors of the National Reverse Mortgage Lenders Association. "There are trillions in forward mortgages. The reverse mortgage industry currently pales in comparison, but it's growing exponentially. . . . Some day, these are going to be as big as home equity loans."

Reverse mortgages are available to anyone at least 62 years old, regardless of credit or income. Seniors must have some equity in their home, but reverse mortgages can be used to pay off mortgages or home equity loans.

The senior keeps title to their home. And they will never be forced to sell the home as long as they live in it. There is no financial obligation or debt to the seniors' children.

If the home sells for less than the balance due on the reverse mortgage, the federal government picks up the tab. If it sells for more, the senior or their heirs gets the profit.

How much money a person gets from a reverse mortgage will depend on the value of the home, their age and interest rates.

The older you are, the more money you can get out of your home (or condo). And the proceeds are tax free.

And the lower the interest rate, the more money you can get. Interest rates started the year at 2.79 percent, going as high as 3.72 percent before more recently dropping to 3.62 percent.

For a 75-year-old homeowner, a half a percentage point change in interest rates would reduce the amount of money they could get out of their $100,000 by $4,000, Browning said.

"Now is the time for consumers to be looking at this, before rates start rising," he said.

With a reverse mortgage, seniors can opt to take a lump sum, line of credit or fixed payments - or a combination of all three.

The fees for reverse mortgage are typically higher than on a normal mortgage. However, they are not paid upfront, but rolled into the reverse mortgage. Part of the reason for the high fees is part of the money goes to a fund that makes banks whole if the home sells for less than the balance due on the reverse mortgage.

Nearly 95 percent of all reverse mortgages are Home Equity Conversion Mortgages (HECM), which are insured by the government.

Fannie Mae offers the only private reverse mortgage available in all states. Fannie Mae's Home Keeper Mortgage has a higher loan limit but does not offer some of the advantages of a HECM.

Fees will vary by lender so it pays to shop around.

Palumbo surveyed numerous lenders before getting his reverse mortgage from HomeChex, which gave him the most money from his home.

"When it came down to the bottom line, they were the best," he said. "They came right to the house and we discussed it."

 

 

 

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