By Richard Norman, Day Staff Writer. Published on 3/6/2005
Robert and Gail Mohr of Madison faced the prospect of losing their home. Gail's life was threatened by cancer. The couple had a handicapped daughter. And yet they still had monthly mortgage payments to make. They had a business, the Old Madison General Store. But Bob and Gail knew that if one of them died, the surviving spouse could end up without a house, and their daughter, Rebecca, could wind up in a group home. Then Bob saw a television ad promoting something called a reverse mortgage. He telephoned Bradford Financial in Gales Ferry — and now the Mohrs' financial problems are, essentially, solved.
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Using the equity in their home, the Mohrs obtained a mortgage that will be paid off after the second one of the couple dies. They received a lump sum payment that paid off their existing mortgage and furnished them with additional cash for needed upgrades in their home — a new well, new septic system, and other renovations. With further proceeds from the mortgage, they were able to set up a line of credit for themselves, creating available funds to draw on.
“It sounded like win-win,” says Bob. “It's a great situation. It permits us to live here in our house. And when we're gone, we'll have a house to pass on to our kids.”
What exactly is a reverse mortgage? Most people have heard of this innovative financial instrument, but hardly anyone knows how it actually works, and there are a lot of misconceptions about it. To get to the bottom of it we went to Bradford Financial, which has helped many senior citizens obtain reverse mortgages. Joining us was Chris Albanese, a Gales Ferry attorney who is often involved in reverse mortgage transactions.
Glenn B. Johnson of Bradford Financial begins by giving us the broad outlines of a reverse mortgage. It is a type of mortgage developed by the federal government, available to seniors age 62 and over, through which homeowners can access the equity in their homes without having to make monthly payments. The mortgage accrues interest until the house changes hands and then is paid off from the proceeds of the sale of the house. That is, the mortgage remains in force until the homeowner either sells the house or dies. Here is an illustration.
Homeowner Mr. Smith has a house with a market value of $200,000. Smith has a mortgage of $100,000. He is retired now and wishes to be free of the monthly payments, which are difficult for a person on a fixed income. So he has two objectives: to put a stop to monthly mortgage payments and to obtain a lump sum of cash for current and future needs.
The reverse mortgage is obtained from a company called Financial Freedom Senior Funding Corp. Smith qualifies for a mortgage of $150,000. From the proceeds of the reverse mortgage, he pays off his existing mortgage and pockets the $50,000 — and no longer has to make a monthly mortgage payment.
Let's say Smith lives another 25 years. The mortgage accrues interest during that time; his house appreciates in value. Upon his death, his heirs sell the house for $300,000 and pay off the mortgage, which has grown in size to $200,000. His estate is left with $100,000 in cash.
Johnson remembers one couple, in their 70s, who were both still working in order to be able to make their mortgage payments. Johnson explained the terms of the reverse mortgage for which they were eligible.
“ ‘We can retire!', they told me,” recalls Johnson. “The wife was brought to tears when she found out.”
And Johnson adds, “It's nice to be in the business of finding money for people rather than taking it away from them.”
Albanese also looks back happily on his experiences with seniors who obtained reverse mortgages.
“We do the close and the seniors leave and they're ecstatic,” he says. “It's a big deal to them.”
Some details:
- The cash payout from a reverse mortgage can be in one of three forms, or a combination of the three: lump sum, an income option (in regular payments, like an annuity), or a line of credit. In practice, the lump sum is usually the best option.
- The interest is equal to the interest on a one-year U.S. Treasury note plus 11/2 percent.
- The amount for which the homeowner qualifies is based on the person's age, the interest rate and the market value of the home.
- There is a ceiling on the value of a home, set by HUD, that can be mortgaged (in New London County, for example, the ceiling is $223,000).
- No income or credit verification needed.
- Because seniors are frequently preyed upon by unscrupulous financial advisers, the government requires that the borrower meet with a neutral, FHA-approved counselor before signing a reverse mortgage.
One major misconception, Johnson points out, is that the lender takes the person's house away. Not so. The title remains in the hands of the homeowner.
Reverse mortgages are growing in popularity. The number taken out in the U.S. has been doubling each year; there were 40,000 last year.
Which brings us to an important issue: closing costs. Closing costs are higher for a reverse mortgage, because mortgage insurance is required. The insurance protects the lender in the event that the amount of the mortgage is greater than the value of the house at the time of the homeowner's death. The one-time premium is equal to 2 percent of the mortgage amount. So the higher closing costs sometimes scare borrowers away from reverse mortgages.
Still, for most seniors, a reverse mortgage is a life-saver; it can prevent an older homeowner from having to leave his or her home.
Ann Marie Savona, Johnson's colleague at Bradford Financial, has been involved in many reverse mortgage transactions. She has vivid recollections of the benefits. “We've saved people's homes,” she says. “We see the good it does.”
