A Timely Turnaround With a Reverse Mortgage
Before getting a reverse mortgage, Frances Tolson's financial life was a struggle.
Tolson, 64, receives Social Security and works two nights a week as a rehabilitation counselor for the mentally ill, but her income wasn't enough to keep up with her medical and other expenses. "I've worked hard for a number of years," she said. "Unfortunately, like a lot of people, instead of saving for these days, I used it on my children and grandchildren and great-grandchildren."
She filed for bankruptcy because of her inability to pay creditors.
"I was feeling depressed and snowed under," she said.
Now her monthly house payments are up to date and her creditors are paid, thanks to a reverse mortgage obtained last year that allowed her to borrow against equity in her house in Towson, Md. "When I receive my mail these days, I'm happy to receive it," Tolson said. "I can afford to pay those bills. I'm no longer being choked."
Tolson is part of a trend. Last year more than 75,000 reverse mortgages were issued, up from about 45,000 a year before. Reverse mortgages are becoming more common as homeowners and lenders think about ways to cash in on the $2.5 trillion in home equity in the hands of older Americans.
Reverse mortgages work the way they sound. The lender gives the homeowner a loan based on the value of the property and the age of the borrower, minus processing costs. The homeowner may take the money all at once or in monthly payments, or draw it down as needed. It's not taxable income and it does not change eligibility for Social Security or Medicare.
The loan, which is only due if the borrower leaves the house for 12 months or more, uses the homeowner's equity as collateral. It requires no repayment as long as the borrower remains in the house. At the end of the loan, the homeowner or heirs must pay back cash received plus loan costs and interest charged over the life of the loan, usually by selling the house.
For some consumers, reverse mortgages may provide relief from financial pressure or the wherewithal to pursue lifelong dreams. But they're not for everyone.
One concern about reverse mortgages is that the upfront costs can be high, although proponents say that the fees are warranted by the work involved. The homeowner pays an origination fee and a mortgage insurance premium (most reverse mortgages are insured by the federal government) as well as a monthly mortgage servicing fee.
"The typical borrower is a 75-year-old widowed woman with a $250,000 house," said Bronwyn Belling, of the AARP Foundation's Reverse Mortgage Education Project. "It isn't uncommon for costs, when they are added up, to be as much as $25,000."
Most homeowners -- about 85 percent -- want to stay in their homes as they age, and reverse mortgages can make that possible. Sometimes the proceeds of the loan may be used to make the house safer and more accessible for homeowners with declining mobility. But experts caution that there may be cheaper ways to make those modifications.