A way to stay at home

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 income.

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 mortgages.

"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 it."

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.