Like millions of Americans, Bill and Helen Bluett's greatest financial asset is their home, a Spanish-style dwelling just a quarter of a mile from the ocean in San Clemente, Calif.
Selling the place and buying a cheaper one elsewhere could have brought the couple hundreds of thousands of dollars in extra money for their retirement years. But there was one problem with that idea.
So this year, the Bluetts signed up for a reverse mortgage, a type of loan that allows older borrowers to tap their home equity without making payments as long as they live in the house.
With the money, the Bluetts are more than able to take on projects like remodeling the kitchen and bathrooms. More important, Bill Bluett said, the reverse mortgage makes them financially prepared for "any emergency, whether it's medical or whatever, that might come up" in the years ahead.
"My wife and I decided it would give us a lot of peace of mind," he explained.
Reverse mortgages have been criticized for high upfront costs. Lenders may charge 2 percent of the loan amount in origination fees, and most borrowers also pay 2 percent for mortgage insurance, along with other fees that can far exceed those in conventional home loans.
Loan amounts often are subject to strict limits, which vary based on location, and many financial planners still are not familiar enough with reverse mortgages to guide their clients.
But in an era when legions of older homeowners are sitting on vast amounts of untapped equity, reverse mortgages seem to be catching on. Competition has started to push down costs, and lenders are beginning to offer loans on unlimited amounts, a noteworthy shift in an industry that has mostly relied on federally insured mortgages with strict caps.
In recent months, Countrywide Financial Corp., Bank of America Corp. and BNY Mortgage Co. have scaled up their efforts in the growing field.
After years on the sidelines, Wall Street has entered the game, with investment banks for the first time purchasing such loans in a secondary market, which may further stir innovation and encourage more lenders to offer reverse mortgages. At the current rate, lenders could sell more than 100,000 reverse mortgages this year, more than double the number from 2005.
"The significant thing in the last several months is that the big boys are coming in," said Bart Johnson, president of Irvine, Calif.-based Financial Freedom Senior Funding Corp., a leading provider of reverse mortgages. "The last six months to a year have been incredible."
Housing and Urban Development Secretary Alphonso Jackson recently described reverse mortgages as "the bright spot in today's housing market," adding that "their significance will only increase as more Baby Boomers reach retirement."
In a conventional mortgage, the lender lends you money to buy a house, and you gradually pay down the debt and build up equity as you make monthly payments.
In a reverse mortgage, the lender gives you the money -- as a lump sum, in monthly installments or as a line of credit -- and takes your home equity as payment.
Typically, reverse mortgages don't have to be paid back until you sell your home, move or die. People must be at least 62 to qualify for a reverse mortgage.
As with all loans, reverse mortgages have fees and charge interest.
For example, a 78-year-old borrower whose home is worth $200,000 might end up with a reverse mortgage of $123,000, based on his age, interest rate levels and other factors. In this case, the borrower might pay about $13,000 in upfront fees, including a $4,000 loan origination fee, $4,000 in mortgage insurance and a $4,000 "set-aside" to cover servicing costs for the life of the loan, according to Fannie Mae, the federally chartered lender.
Based on recent interest rates, such a loan might come with an adjustable interest rate of about 6 percent, with interest charges compounding during the life of the mortgage.
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