Can a reverse mortgage help you have a better retirement?

The Palm Beach Post, Fla.

June 19, 2010

Three years ago, Loxahatchee resident James Gamble was preparing for retirement. His home was paid off, he wasn't married, and he has no children needing an inheritance.

So to finance his retirement -- and a summer home in West Virginia -- Gamble took out a reverse mortgage, getting about $200,000 out of a house he paid an estimated $85,000 for in 1994.

"I would get Social Security and I had enough to live on and pay my bills, but I couldn't have bought a house in West Virginia for sure," said Gamble, 65. "I didn't want to retire and just do nothing."

Reverse mortgages allow seniors to convert their home equity into cash. Instead of paying the bank each month, the senior gets paid, either in a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves or sells the house. Because it is a non-recourse loan, the lender cannot seek repayment from any source other than the property.

Reverse mortgages have been around for at least two decades, but became more popular during the housing boom as home values skyrocketed.

Today, mortgage brokers say they are less attractive to homeowners whose values have plummeted, but can still be a good source of money for some seniors.

Because the Department of Housing and Urban Development cut the amount of equity that borrowers can get out of their homes to 90 percent in the fall, lenders are hoping to drum up business by reducing or eliminating origination and servicing fees.

High fees, including up to $6,000 in origination fees, have been one of the biggest criticisms of reverse mortgages.

Borrowers, who must be 62 to qualify, are also required to pay mortgage insurance, which guarantees that the lender will always be paid in full.

"It's not a product for everyone," said Ramona Barbagallo, a reverse mortgage expert at Sterling Mortgage Services of the Treasure Coast. "For a lot of people, this is their last asset and if they're tapping into their last asset for funds, then they could potentially use it up and have nothing left."

There also have been fraud concerns raised. The National Consumer Law Center compared reverse mortgage risks in an October report to those posed by the subprime mortgages. Vulnerable seniors can be misled by the complicated product, or persuaded to put their proceeds in annuity contracts or expensive long-term care insurance.

"If someone is trying to sell you something with the money you've gotten, it's a red flag," said David Certner, legislative policy director for the American Association of Retired Persons.

Under HUD rules, a borrower must attend a consumer counseling session with an independent nonprofit group before signing up for a reverse mortgage.

Still, they can be good products for some people.

Barbagallo had a 100-year-old client who took out a reverse mortgage that allowed her to have full-time care in her home. Other clients have used it to pay for golf memberships, Barbagallo said.

Jeffrey Lewis, chairman of Generation Mortgage, said adult children were often the main objector to reverse mortgages because of their effects on inheritances.

Sentiment has changed under the current economic situation, Lewis said. Financially struggling adult children may not be able to take care of their parents, and parents may struggle to pay their bills because of investment losses.

"It feels good for the senior to be able to take care of themselves," Lewis said. "They can use their own money and stay in their home."

One cautionary note, Lewis said, is that borrowers are expected to pay their own insurance and taxes -- costs typically escrowed in traditional loans.

For Boynton Beach resident Irving Stimler, 83, a reverse mortgage allowed him the "extra little boost" to take the occasional cruise.

But in recent times, he's used the income for regular living costs after investments dissolved.

"It was extra income at first, but now we really need it," he said.

Copyright (c) 2010, The Palm Beach Post, Fla. Distributed by McClatchy-Tribune Information Services.