A way to stay at home
Reverse mortgages offer an alternative for cash-strapped
seniors in expensive homes
by Patricia Gosˇlvez
Susie and Joe Regins own a home in Palo Alto, and they've managed
to put aside a very small nest egg. Both are in their 70s, and both
were in relatively good health until Joe suffered from a debilitating
stroke. Susie, although resilient and healthy, cannot provide the
kind of care Joe needs, so she's hired a nurse. Meanwhile, their
meager savings slips away as medical bills come piling in. Although
Susie and Joe Regins don't exist, their story is a common one.
Senior homeowners, like Susie and Joe Regins, can now exchange
part of the equity they've accumulated on their home into tax-free
A reverse mortgage is the exact opposite of a regular, or forward,
mortgage. It allows seniors a chance to continue living in their
homes without transferring title or making monthly payments.
Don Rush, a local volunteer financial advisor, counsels seniors
regarding Medicare options, supplements, HMOs and long-term care
(LTC). He says that many Palo Alto seniors suffer from a variety
of illnesses that require consistent medical attention, such as
diabetes, post-stroke ailments or cancer. These people are seeking
a way to compensate for the loss of their savings accounts that
dwindle quickly when paying medical bills.
"Reverse mortgages have been lifesavers for seniors that are in
need of monthly income, and for seniors that have a debt-load they
can't pay off. They can clear off their consumer debt or medical
bills this way," said Nancy Soule, senior loan officer for Pacific
Republic Mortgage, formerly known as National Pacific Mortgage,
in San Jose.
For as long as reverse mortgage borrowers live in their house,
monthly payments are eliminated. The downside, however, is that
the interest on the loan accrues each and every month, therefore
causing the borrower's debt to increase. A common term for reverse
mortgages is a "rising debt, falling equity loan," whereas a forward
mortgage is considered, a "rising equity, falling debt loan."
"Many people in Palo Alto don't have large savings," said Rush,
"but they have enormous equities."
Soule agreed, but added that "they'll only be able to tap into
a small amount of that."
The maximum loan, which is provided by the Department of Housing
and Urban Development (HUD), is $239-$250,000 for the Bay Area.
"And we can't lend them that full amount. We only lend them maybe
one-third or half of that simply because we have to figure that
that loan is always increasing by the month-by-month interest due.
We certainly can't lend them their total equity," said Soule.
"How might a long-term financial plan work for Susie and Joe Regins?
At the rate of spending, where will they be in a few years?" Rush
asked. "If their savings reach $87,000, then they qualify for MediCal,"
he said. Another option would be to take out a reverse mortgage
so that they wouldn't have to move Joe to an empty MediCal bed,
which could be anywhere in California. This way they can turn the
equity they've accrued into income and stay in Palo Alto. Either
way, a big part of their financial burden will be gone.
Their equity, via a reverse mortgage, can turn into a monthly check,
an immediate cash advance, a creditline account, or a combination
of all three, he said.
There seems to be no preferred way to receive payments. It simply
depends on the amount, the borrower, the amount of equity the home
has, and a number of other interdependent factors that are unique
to each borrower, he added.
The loan must be paid back when the last surviving borrower dies,
sells the home, or permanently moves away. It may also have to be
paid back if homeowners don't pay property taxes, or don't take
care of the upkeep of the home.
If the last surviving borrower dies, then the loan must be repaid
before the home's title can be transferred to his or her heirs.
The heirs have a few options about how to pay it back. They can
repay the loan by selling the house, or by using other funds, or
they can take out a new forward mortgage against the home and pay
it that way.
"The number of reverse mortgages has more than quadrupled since
the early 1990s when the product was first introduced," according
to a recent Wells Fargo press release.
"We believe there are three primary reasons for this growth: a
better understanding of the product; an aging population; and an
effort by various organizations to promote the benefits and flexibility
of the product," said Jeffrey Taylor, vice president of senior products
for Wells Fargo Home Mortgage in the press release.
There are some big disadvantages to reverse mortgages, warned Rush,
who also works closely with the Counsel on Aging (COA). For example,
the contracts are often much more complex than those for forward
"This added complexity presents the opportunity to squeeze more
money out of borrowers with high interest rates, handling fees and
shared equity," said Rush. Some companies have done this, and, he
added, "It's disgusting, there's absolutely no justification for
Rush wants to clarify for seniors that a reverse mortgage is not
a high-risk loan as so many borrowers are often told. "It's a real-estate
loan," he said.
"It's a decision with a lot of choices you don't like," said Rush.
"Consider re-financing the house or selling it before you decide
on a reverse mortgage. And don't take the first one you're offered.
"If given a reasonable analysis," he said, "then choose arbitrarily
because you're going to adjust to whatever it is - you've looked
at the preponderance of evidence, as they say in civil trials, and
now you must make a decision."
Box at end:
Reverse mortgages on the Web
For more information on reverse mortgages
check out the AARP's Web site at http://www.aarp.org/revmort/contents/overview.html
or the National Center for Home Equity Conversion (NCHEC) at http://www.reverse.org/Basic%20Q&A.HTM.