Reverse mortgages' popularity grows despite costs

After a decade of retirement, John and Stella Dohrer were increasingly feeling squeezed financially as living costs edged upward year after year.

The Mesa couple weren't starving, but their Social Security payments weren't always enough to meet monthly insurance costs.

So earlier this year, they tapped into the equity built up in their modest townhouse on University Drive using a reverse mortgage.

"It's just been something good for us that gets us over the hump every month," said Stella Dohrer, 78.

Reverse mortgages allow homeowners older than 62 to access their equity without having to sell the house or take on extra monthly bills. And it's rapidly gaining popularity among America's growing senior population.

More than 90,000 federally insured reverse mortgages were taken out from October to July, up from just 6,640 in fiscal 2000, according to the National Reverse Mortgage Lenders Association.

The reverse mortgage is gaining acceptance as a financial planning tool as people live longer, association spokesman Darryl Hicks said.

"In a lot of cases, their traditional retirement vehicles, such as IRAs, pensions and even Social Security, are not allowing them to live financially secure lives," Hicks said.

The 70 million-member baby-boom generation is on the verge of retirement, and they haven't saved like their parents did, said Eric Bowlby, president of AmeriFirst Financial. The Mesa firm began offering reverse mortgages about nine months ago.

"It's going to come as a necessity," Bowlby said.

More Americans have shown interest in reverse products partly because of the low interest rates and increasing property values enjoyed in recent years, said Bronwyn Belling, a reverse mortgage specialist with the AARP Foundation.

But it's important not to rush into a decision too quickly, Belling said.

"It proves to be a very expensive way to borrow money, especially if they don't expect to stay in their home a very long period of time," she said.

Upfront costs can be high, with lenders charging up to 2 percent in origination fees. Borrowers should look at all their options, including downsizing, getting help from family or taking out a home equity loan, she said.

So much change is also taking place in the industry right now, it may be worth it to wait and see what options become available, Belling said.

"Take your time and understand it carefully before you make a decision," she said.

With a reverse mortgage, the loan amount is based on factors such as the owner's age, the home's location and appraised value, and interest rates. Generally, the older a borrower is, the more his home is worth and the less he owes on it, the more money he can get. The loan must be paid back when the owner dies, sells the home or no longer lives there as a primary residence.

The most popular type of reverse product is the federally insured Home Equity Conversion Mortgage, which accounts for roughly 90 percent of the market.

With an HECM, a 75-year-old Chandler resident who owns his $265,000 home free and clear could qualify for a $160,556 lump-sum payment or a $1,116 monthly payment for as long as he lives in the house.

Borrowers can also choose to set up a line of credit that they can dig into when needed.

Use of the mortgages has risen dramatically in Arizona with 3,200 taken out in 2006, up from just 128 a decade ago, according to Federal Housing Administration's Single Family Data Warehouse.

Membership in the National Reverse Mortgage Lenders Association has nearly doubled in the past year to 570 firms. And major companies such as Bank of America and Countrywide have launched programs to capitalize on the industry's potential growth.

The reverse mortgage market is on pace to become a $37 trillion business by 2030, said Eric Declercq, managing director of Countrywide Bank Reverse Mortgage. The national company entered the reverse market last fall.

Seniors "have this mass of wealth sitting idle" without many ways to access it, Declercq said.

Yet many people have steered clear of reverse products in the past because they thought it meant giving over the titles to their houses, which is not true, he said.

Borrowers retain ownership of their homes.

The Dohrers had investigated reverse mortgages years before but had opted not to get one for that reason.

But like all borrowers who take out a federally insured HECM, they were required to go through counseling.

"We were a little leery of it," Stella Dohrer said. "When we got all the information, it sounded good to us."

So the Mesa couple took out a loan on their two-bedroom townhouse, which they bought for $40,000 a decade ago and had paid off. The home was appraised at $103,000, and now they receive monthly payments of $400.

"It's enough to take the edge off," said John Dohrer, 75.