HOMEOWNERS Reverse mortgages allow immediate access of equity

More cash-poor seniors use reverse mortgages to supplement their incomes.
PITTSBURGH POST-GAZETTE
Not long ago, Marjorie DeJohn, a widow living on her husband's Social Security, was straining to pay her mounting bills.
"Just to get your car repaired is $200 or $300. I didn't have that kind of money, so I would put it on my Visa," the 70-something retired teacher and medical assistant recalled. "I really was struggling."
It seemed her only recourse was to sell her modest house, but she dreaded the thought of moving out of her cozy neighborhood and finding a new place.
It turns out she didn't have to do either. This spring, DeJohn, from Whitehall, Pa., paid off her home-equity loan and card-card bills and even had money left to invest, all thanks to a reverse mortgage.
"I still have to be careful," she said, "but things are a lot easier."
DeJohn is part of a small but growing number of house-rich, cash-poor seniors deciding to use what's called a reverse mortgage to tap the equity in their homes as a source of tax-free income.
How they work
As the name implies, reverse mortgages work the opposite of regular mortgages. Instead of the homeowner making monthly payments to the lender, the lender pays the homeowner, in a lump sum or in a set amount each month.
Unlike most loans, none of the money has to be repaid as long as the borrower remains in the home. The mortgage, plus interest and fees, are due when the homeowners move or when the remaining borrower dies. And no matter how long the homeowners stay, the payoff can never exceed the market value of the house.
Reverse mortgages are still relatively uncommon, but they've gained popularity as word about them has spread and the need among seniors to supplement their incomes has grown.
"A lot of people thought their retirement plans were set," only to see the interest income from their savings savaged by falling rates and their investment portfolios decimated by the plunge in the stock market, said Bronwyn Belling, a reverse mortgage specialist with the AARP Foundation in Washington, D.C.
For the fiscal year ended Sept. 30, sales of the most popular type of reverse mortgage rose 40 percent nationwide, to 18,097, up from 13,049 the previous year and more than double the 7,781 in fiscal 2001, according to the National Reverse Mortgage Lenders Association.
Improved lifestyles
While some seniors have relied on reverse mortgages to help pay basic living expenses, others have turned to them to improve their lifestyles.
For Louie and Clemia Pasquariello, of Washington, Pa., a reverse mortgage allowed them to buy the summer home they'd always dreamed of but otherwise wouldn't have been able to afford.
This summer, the Pasquariellos used the $100,000 they got through a reverse mortgage on their $170,000 home to buy and update a two-bedroom, chalet-style cottage on the Tygart River in Fairmont, W. Va.
"Like my husband says, the equity in your home is just lying there, and when you die, someone else gets it," said Clemia Pasquariello, 71, who got the idea for a reverse mortgage from her daughter, Karen, who sells them for a living.
She and her husband are so satisfied with their reverse mortgage, "we're telling everyone about it," she said. "We have some friends with big medical bills who are applying for one now."
Relatively high cost
For all their benefits, reverse mortgages aren't for everyone.
One of the chief drawbacks is their relatively high cost, which typically includes an origination fee, a monthly service charge of about $30 to $35, mortgage insurance premium, appraisal fee and other closing costs. Generally, the only out-of-pocket expense for the borrower is for the appraisal. The rest of the fees are rolled into the loan.
"It's not uncommon, on a $200,000 or $300,000 home, for the loan to cost $8,000 to $12,000 to set up," Belling said. "It's an expensive way to borrow money for a year or two."
The best candidate for a reverse mortgage, she said, is someone who expects to stay in the home for some time, say 10 or 15 years, which effectively lowers the costs.