Some cash-strapped senior citizens
are using the equity in their
homes to win a...
Reversal ofLois O'Connor of Kaaawa
By Rob Perez
took out a reverse mortgage to get out of
a financial bind, a common use
for the instrument
Photo byKen Sakamoto
Star-BulletinWhile many Hawaii residents were celebrating the start of a new year, Lois O'Connor was trying to cope with a personal crisis. On New Year's Eve, she lost her job as manager of a gift shop. O'Connor got no advance warning, no severance package to ease the blow.
And at age 74, the Kaaawa resident knew her chances of finding comparable work in a depressed economy weren't good.
But O'Connor had to do something. The monthly payments on her mortgage and a home-repair loan totaled nearly $1,200 -- payments she couldn't make on her Social Security income alone.
So she took out a reverse mortgage.
O'Connor borrowed money on the equity she had in her home, paid off the old mortgage and home-repair loan and now gets a small monthly payment with what's left.
"This really saved my life," she said. "It's absolutely incredible. I can breathe and don't have to worry (about monthly loan payments)."
Reverse mortgages allow homeowners 62 or older who have completely or nearly paid off their mortgages to convert that equity to cash without having to sell their homes. The loans have been available in Hawaii since about 1990, mainly through small or mainland-based lenders.
Only a small number of the mortgages have been issued.
But their popularity is expected to rise now that a major Hawaii bank, American Savings Bank, has entered the reverse-mortgage market and others are considering it. And the types of reverse mortgages available have increased, which should boost their appeal, say consumer advocates.
Hawaii's demographics make this a good, albeit small, market for reverse mortgages, lenders say.
Because of high housing costs and the double-digit appreciation rates of real estate in years past, Hawaii's elder homeowners -- especially those who bought several decades ago -- tend to have much more equity in their homes than residents in most mainland communities.
But many haven't tapped that equity, lacking sufficient income to qualify for traditional home-equity loans. And because of Hawaii's high cost of living, they often squeeze by each month on fixed incomes, asset rich but cash poor. Any big and unexpected expenses create real hardships.
"If they own their home free and clear, they're sitting on a gold mine and can't do anything with it," said Michael Haxton, president of Hawaii Credit Counseling.
A reverse mortgage lets homeowners tap that gold mine. It works much like a traditional mortgage, only in reverse. The lender pays the borrower a set amount each month, a lump sum or provides a line of credit that can be tapped as needed.
The loan -- plus interest -- doesn't have to be repaid until the homeowner moves, sells the home or dies. In the latter case, heirs have the option of paying off the loan and keeping the home. But that option isn't exercised often: the lender usually gets reimbursed through sale of the home.
Because such mortgages are relatively new and differ from traditional loans, experts urge consumers to be sure they understand all the fine print before signing anything.
In fact, the two loan programs backed by the Federal Housing Administration and Fannie Mae, the nation's largest supplier of mortgage funds, require interested applicants to attend a reverse mortgage seminar -- independent of the lender -- before applying. Haxton's nonprofit organization is one of several that conduct such seminars.
The cost of the loan can be steep if the homeowner receives relatively small monthly payments and plans to stay in the home only a few years, said Bronwyn Belling, a reverse mortgage specialist with the American Association of Retired Persons Foundation in Washington, D.C. But for people planning to live in their homes many years, the loan becomes much more attractive, she said.
"With Hawaii's high costs, this makes a lot of sense for people on fixed incomes," Belling said.
Lenders such as American Savings that offer the Fannie Mae loan charge an upfront fee of 1 percent of a home's adjusted value plus an origination fee of as much as 2 percent. In addition, the borrower is charged closing costs for such items as an appraisal and title insurance. All the fees can be folded into the loan, so the borrower doesn't have to pay anything out of pocket.
Interest rates usually are adjusted monthly or annually and typically are higher than traditional adjustable-rate mortgages. For Fannie Mae loans, which are adjusted monthly, the rate can climb as much as 12 percentage points over the life of the loan -- another reason consumers should consider the cost of such loans.
O'Connor said fees on her Norwest Mortgage loan totaled about $12,000. But she figured the high cost was worth the benefits, including not having to turn to her children for a bailout. Now that she doesn't have to make $1,200 in loan payments each month, O'Connor can live on her Social Security income. "This way I'm self-sufficient," she said. "You can hold your head up a little higher."
How much someone can borrow depends on several factors, including the homeowner's age and the home's value. The older the borrower, the larger the mortgage can be -- up to a maximum amount for the government-sponsored programs.
For Fannie Mae, the cap is $321,900 on Oahu; for FHA, it's $241,425. Loans offered independent of either program, such as those with Transamerica HomeFirst, typically have no limit.
The money can be used for any purpose.
Anthony Garcia of Transamerica, which does about eight to 10 reverse mortgages a month locally, said the loans are used to pay for medical care, home repairs, college educations -- even to purchase homes for grandchildren.
Because of the cost of the loans, borrowers should have a specific need that can't be met in other ways, some lenders say. The need could be as basic as increasing one's standard of living.
"A reverse mortgage is basically a loan of need," said Roger Reynolds, Norwest's national coordinator for reverse mortgages. "Homeowners just don't take out the loans to have fun with the money."
Some uses are uniquely Hawaiian. Haxton recalled one case in which a 102-year-old man came to his office to attend a reverse mortgage seminar. The man wanted to borrow money to buy the land under his leasehold home.
For lenders, reverse mortgages hold some risk because they involve predicting life expectancies and property values well into the future. If a borrower lives longer than expected or property values fall, the borrower or his heirs never have to pay back more than the value of the home.
One reason some homeowners are reluctant to take out such loans is because they won't be able to leave their homes to their children, even if the children are grown. O'Connor said that was a concern of hers.
But Haxton said that shouldn't be. What's more important, he said, is that elderly homeowners with a lot of equity in their homes but little cash flow be able to spend their remaining years in relative comfort, without having to struggle month to month.
"Who says they have to leave their kids half-a-million dollars and a home free and clear," Haxton said.
Eligibility requirements:
Borrower 62 or older
