Progress in reverse

Dottie Downs paid $22,300 for her three-bedroom house near Sahara Avenue and Valley View Boulevard in 1966. Like many seniors today, she's cash poor and house rich.

With a failing air conditioner and roof in need of expensive repair, she thought about selling her home and moving into a condominium.

"I looked at some condos and when I came home I thought, 'Why spend more money to have less?' So I stayed here," the retired casino purchasing agent said.

Downs took out a reverse mortgage three months ago to pay for the home repairs. She also uses the money it to travel with her boyfriend, Lloyd.

"If I sell the house, I've still got to live somewhere, and the reverse mortgage was the least- expensive thing for me to do plus I got the line of credit," she said.

Suzanne Clayton of Unity Mortgage in Las Vegas said reverse mortgages are becoming more popular. Since they first became available in 1989, there have been 300,000 reverse mortgages. By 2010 experts predict there will be 16 million, she said.

Home equity for seniors is also growing. The amount of home equity held by American homeowners age 62 and older grew by an estimated $19 billion in the first quarter to $4.3 trillion, according to the Reverse Mortgage Market Index. The Hollister Group, a McLean, Va., consulting firm, forecast that senior home equity will grow to $37 trillion by 2030.

Despite this growth, Clayton said, senior citizens have the wrong idea about reverse mortgages and need to be educated on how the program works to dispel certain "myths."

The government or bank never owns the home, she said. The title does not have to be "free and clear" and remains in the homeowner's name.

The money is tax-free and can be paid in a lump sum, monthly payments, line of credit or combination of all three. All mortgage payments stop and the homeowner has the option of selling the house at any time.

There are no restrictions on how the money can be spent. Borrowers can use it to supplement current income, satisfy loans, pay off credit cards and medical bills, travel, even buy a new car.

"More and more seniors are losing their homes. This is beyond belief in a country as strong as the United States," Clayton said. "I looked at it before I was 62 so I could retire early and get out from under my mortgage payment. It gave me a new lease on life."

Clayton said she took her reverse mortgage in a lump sum and used it to buy property in Wyoming that she hopes will appreciate.

It's a government-designed program and Federal Housing Administration insured. Unlike a second mortgage or home-equity loan, there are no income, credit or health qualifications. Homeowners are still responsible for taxes, insurance and general home upkeep. Homeowners have to be 62 or older to take out a reverse mortgage.

Donna Iwane of Hawaii-based Pacific Monarch Financial said the negative image of reverse mortgages comes from adult children who want that equity when their parents die.

People in their 70s and 80s probably spent their whole lives paying off a 30-year mortgage to build equity in their home, Iwane said. Today's generation spends maybe three to five years paying a mortgage.

"Nobody stays in a house for 30 years any more," she said.

Whereas our parents might have doubled up on mortgage payments, financial advisers are now telling people to pay the minimum mortgage amount and put the extra money in high-yield investment funds, she said.

"With our generation, parents felt like they had to give back to the kids, but now they've got life insurance," Iwane said. "The kids are adults, they're making a living. It's not like they need it. I would prefer it for my mom. The cost of living is not keeping up with the economy. Look at cigarettes and gas if they drive. Bread is not 5 cents any more."

Some seniors worry that they could eventually owe more than the value of the home. A reverse mortgage is a nonrecourse loan, which means the bank can never come after any person or estate for repayment of the loan, Clayton said.

Larry Landis, regional vice president of Unity Mortgage's home office in Georgia, said the 2 percent mortgage insurance premium ensures not only the senior citizen but the senior's estate that the house will never be of less value than the loan. Whatever the house sells for satisfies the debt, he said.

"Look at (Hurricane) Katrina. Those people with reverse mortgages are still getting payments and still have their line of credit," Landis said. "Besides that, they're not getting foreclosed on."

A reverse mortgage is identical to an FHA loan except interest is charged in reverse instead of upfront, he said.

The government is not going to let the senior use all of his or her equity. If the senior doesn't use all the money, the heirs will probably end up with more money in the end because the home usually appreciates faster than the interest rate on the loan, he said.

Stephanie Prather, a reverse-mortgage specialist at Summerlin Mortgage, said there is much misinformation about reverse mortgages coming from financial planners, accountants, Realtors and lenders who lack expertise in this type of loan.

"So many people who come to me are scared about outliving their money," Prather said. "Others are worried they will wind up living with their children, some frustrated with rising housing and health care costs. The stigma of reverse mortgages is finally dwindling. We are now seeing some use them as financial tools to leave more money to their children, rather than less."

Prather, who met Downs at a reverse-mortgage seminar, went to her home with attorney Robert Cannon to explain the program.

"We sat down and met because a reverse mortgage isn't for everybody," she said. For example, it doesn't make sense for someone who plans on moving in two years. If money is needed for a shorter period, a home equity loan may be a better choice.

Downs said the attorney gave credibility to the program. She was convinced when he said he did the same thing for his own mother.

Many of the same costs that someone pays to land a home purchase loan, or to refinance an existing mortgage, apply to reverse mortgages. Those include an origination fee, upfront mortgage insurance premium, appraisal fee and certain other closing costs.

In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage.

Landis of Unity Mortgage said there's no out-of-pocket costs for seniors to get a reverse mortgage. A lot of them don't even have money for the appraisal, he said.

Under the FHA Home Equity Conversion Mortgage program, which accounts for 90 percent of all reverse mortgages made in the United States, the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount. The FHA loan limit now varies from a low of $200,160 for rural areas to a high of $362,790 for high-cost metropolitan areas.

AARP, a nonprofit senior lobbyist organization, helped the government rewrite regulations on reverse mortgages but does not endorse any reverse mortgage lender or product.

"When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small," AARP explains on its Web site.

"If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan.

"In short, a reverse mortgage is a 'rising debt, falling equity' type of deal. But that is exactly what informed reverse mortgage borrowers want: to 'spend down' their home equity while they live in their homes, without having to make monthly loan repayments."