Retiring on a Reverse Plan
By: Kathleen M. Howley
HAVERHILL, Mass. -- Elie Labombarde, 78, didn't have a
retirement plan at the machine shop he ran. His home in Haverhill, though,
had risen in value to $270,000 from $24,500 when he bought it in 1962.
"I'm lucky to have the house to bank on," he said.
In March, "I took a lump sum reverse mortgage and invested it so I'll
have something to live on."
Reverse mortgages let people 62 and older borrow against the
equity in their homes. Typically no payment is due until the borrower dies,
when the heirs assume responsibility for paying off the principal and
interest, which they can do by selling the home.
With home values up 30 percent since 1995 and 34.5 million
Americans at retirement age or older, the number of reverse mortgages has
tripled in four years to 8,100 last year, the U.S. Department of Housing and
Urban Development said.
With another 41.8 million Americans aged 50 to 64, Wells
Fargo & Co. and GMAC Mortgage are among lenders that see a developing
Reverse mortgages have been around for about 20 years,
though they account for less than 1 percent of the trillion-dollar-a-year
mortgage market. Other active reverse mortgage lenders include North
American Mortgage Co. and Alliance Mortgage Co.
Reverse mortgages are starting to overcome a checkered past.
In the 1980s, consumer advocates said the loans weren't in borrowers' best
interest because some lenders were not only charging interest but also
taking a stake in any gain in property value, increasing the cost to
With Fannie Mae and Freddie Mac adding to the loans'
credibility by purchasing them, consumer advocates have come to accept
reverse mortgages as a financial planning tool for senior citizens who are
house-rich and cash-poor.
"They spent a lifetime paying for that house. It makes
sense for them to use the equity, if they need it, while they're still
alive," said Bronwyn Belling, a reverse mortgage specialist with AARP
Often a reverse mortgage is the only home loan available to
seniors who don't have enough income to qualify for a "forward,"
or traditional mortgage requiring monthly payments, Belling said.
Most of the people who make inquiries about reverse
mortgages aren't senior citizens, Taylor said.
"They're adult children or other family members looking
for additional solutions to the problem of an aging person not having enough
to meet monthly housing expenses," Taylor said.
A typical customer is a 70-year-old widow with a home valued
at $135,000 that has no mortgage on it, he said. She would be eligible for
either a $66,700 lump sum or a lifetime monthly payment of about $400, he
Some people use the loan as a monthly income supplement for
prescription drugs not covered by their insurance, some use it to maintain
homes or make alterations for handicap use, and others take a lump sum and
use it to travel or give it to family members who need money.
That concerns Len Raymond, director of Homeowner Options for
Massachusetts Elders, a Boston nonprofit group.
"If they pull the money out of their house and use it
for frivolous reasons, or give it to their kids so the kids can buy a house,
the equity won't be there if they need it down the road," he said.
"Chances are they're going to be living a lot longer than they
Obtaining a reverse mortgage doesn't obligate a homeowner or
heirs to sell a home, said Bud Carter, senior director of residential
finance with the Mortgage Bankers Association in Washington.
"Either you or your heirs can always pay off the debt
and keep the property," he said.
The amount of the loan plus the interest accrued typically
does not have to be paid back until a person dies or vacates a house for
more than 12 months, he said.
"Part of the challenge with reverse mortgages is it requires some mental gymnastics to understand the concept," Carter said. "You have to think in reverse -- it's a mortgage, and the bank pays you."