The combination of soaring home values and low interest rates has spurred a growing number of older homeowners to seek reverse mortgages. In fact, the industry is on track to see a record number of FHA Home Equity Conversion Mortgages this year, according to the National Reverse Mortgage Lenders Association.

Some 8,522 HECMs, which are insured by the Federal Housing Administration - an arm of the U.S. Department of Housing and Urban Development - were closed in the eight-month period ending May 31, 2002; just 5,055 such loans were closed during the same period last year.

A reverse mortgage is a loan available to homeowners 62 and older. It allows them to convert part of the equity in their home into tax-free income without selling their home, giving up title, or taking on a new monthly mortgage payment. The funds can be used for anything - home improvement projects, health care, retirement, travel, etc.

Reverse mortgages can be taken out in a lump-sum payment, line of credit, fixed monthly payment for life (or a shorter period), or as a combination of monthly payment and line of credit. The loan is due when the borrower permanently moves out of the home. When the loan comes due, the borrower or his or her estate can never owe more than the current value of the home, even if the home has declined in value since the reverse mortgage was taken out.

"When you speak with seniors, most express that an ability to remain in their homes and choose the kind of care and lifestyle they desire is paramount," said Peter Bell, president of the NRMLA.

Norman and Margaret Van Dine of Nobleboro, Maine, used a reverse mortgage to pay for a downstairs bedroom - they were getting tired of the trek up the stairs. They also wanted more room to accommodate visits from their children and grandchildren.

And Helen Rouse, of Atlanta, Ga., uses her reverse mortgage to cover ever-increasing medical costs.

In 2001, the federal government implemented legislation that gives seniors a wider range of options and caps the origination fee at $2,000 or 2 percent of the loan amount.

State and local governments offer the lowest cost reverse mortgages.

Reverse mortgages are also available through the private sector and include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which means they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live beyond your remaining life expectancy. The reported median closing cost in 1999 was $3,400.

Still, despite soaring home values and basement-level interest rates, older homeowners still need to do the math to determine whether a reverse mortgage will be beneficial and not end up costing them.

If you're older than 62 and plan on selling your home in the near future, a reverse mortgage probably won't be the answer. You may also come out ahead by selling and then buying a less expensive house or taking out a home equity loan.

The American Association of Retired People offers a calculator on its web site to help determine whether a reverse mortgage will be beneficial.

Another factor to weigh in considering a reverse mortgage is the effect it will have on your heirs.

"A loan with "rising debt and falling equity" means there will be less equity left for your heirs," the AARP says on its web site. "If you get a lot of cash over many years from the loan, there may be little, if any, left for them."

On the other hand, children of those who pursue a reverse mortgage may be thankful that their parent can stay in their home and take care of him or herself.

The AARP advises those 62 and older who are considering a reverse mortgage to thoroughly review all the information on its web site, including the various interest rate options, before making a decision on this complex matter.

Published: September 23, 2002

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