Tapping into equity

A house increasingly is more than a roof over the head for aging Sonoma County residents — it is a tool for financing retirement.

A growing number of retirees are tapping equity in their homes by taking out reverse mortgages. These loans, created solely for homeowners 62 or older, never have to be repaid as long as the borrower lives in their home.

Most use reverse mortgages to pay off their existing loans, wiping out their monthly mortgage payment. Others use them to draw a steady stream of cash out of their homes every month, supplementing other sources of income.

“It’s become more of a mainstream financial tool. Reverse mortgages are becoming a household word,” said Bronwyn Belling, who manages an education project on reverse mortgages for AARP.

But these mortgages are not for everyone. They are far more costly than home equity loans. There also could be benefits to selling and moving to a less expensive home.

Furthermore, falling home prices in Sonoma County may make it harder for some borrowers to qualify for a reverse mortgage and might force some to accept smaller loans than they had expected.

But lenders have not retreated from this segment of the mortgage market. Indeed, the choices have grown in recent years.

More than 900 people in Sonoma County have taken out reverse mortgages since they first became available in 1989, according to the Federal Housing Administration. Of those, more than half were issued in the past three years. Nationwide, nearly 350,000 people have taken out reverse mortgages, with about a third of the loans originated just last year.

More comfortable about debt

Demand is driven by aging baby boomers who are more comfortable with debt — and spending the equity in their homes — than their parents were. Many are feeling financially strapped with the stock market in turmoil and interest rates falling on savings accounts. At the same time, rising living expenses and health care costs are cutting into Social Security and pension payments.

“Everything is very hard. They can’t take that extra trip because they’re just trying to pay their bills. Their Social Security and small pensions are not fulfilling their needs,” said Jill Gromm, an agent with California Reverse Mortgage Consultants in Santa Rosa.

Traditionally, homeowners have sold their houses or taken out home equity loans to crack into their nest egg for retirement.

But the housing downturn makes selling more difficult. And home equity loans are harder to get, the result of tighter credit standards adopted in response to record foreclosures.

Reverse mortgages, available for nearly two decades, have become increasingly popular as the population ages. More lenders are offering them as a result.

“Seniors are looking more and more to help defray the costs of retirement in new ways,” said Corey Carlisle, spokesman for the Mortgage Bankers Association.

Turning homes into retirement funds gained greater acceptance during the last real estate boom, when property values soared to record levels. Prices have declined over the past three years, but retirees who built up enough equity in a home still might qualify for a reverse mortgage.

Loan amounts are based on how long borrowers might live and how much home values will grow so there is equity remaining when the retiree dies, sells or moves.

Reverse mortgages carry higher costs up front than traditional mortgages and work best when a person lives in a home for a long time. AARP also cautions against spending too much equity too soon, leaving less for health care needs or everyday expenses.

Borrowers must receive counseling from an independent, nonprofit agency to ensure they understand how reverse mortgages work.

The borrower only repays the loan if they sell or move. If they remain in the home until death, heirs must refinance or pay off the loan, either with cash or by selling the house.

Getting rid of loan payments

Demand is growing, particularly among retirees seeking to rid themselves of mortgage payments.

“It frees up your money. It’s ridiculous to be sitting on equity and it’s not earning anything for you,” said John Allred, who took out a reverse mortgage on his Oakmont house.

Allred and wife Liliane, both in their mid-60s, made the move after dental bills began piling up.

Figuring they better be prepared for rising health care costs as they get older, the Allreds qualified for a $205,000 reverse mortgage on their $425,000 house. They paid off the $200,000 loan on the home and no longer have to make that $1,250 monthly payment.

The couple now takes the money they would have spent on their monthly mortgage and invests it in certificates of deposit. Eventually, they want to buy income property.

“Before, I worried about investing. I wasn’t about to take a chance like that,” he said.

But the reverse mortgage was not cheap. To get the loan, the couple spent $17,000 in fees and mortgage insurance costs.

“To originate one of these is very expensive. You have to think long and hard about it,” he said.

The couple plans to stay in the home long enough for its value to rise, building back equity they can leave to their children as an inheritance.

“Now, we’re not worrying about anything, not really,” he said.

The Allreds are not unique. Most people who take out reverse mortgages use the money to pay off an existing mortgage and free up income for other purposes, said Mike Bencze, also with California Reverse Mortgage Consultants. Some still have quite a bit of equity remaining and either open a credit line or take monthly cash advances. Others have little equity left to spend.

“It’s surprising how many people are still working full-time or part-time to pay a mortgage,” said Bencze. “There are many times where I meet people who have tapped their equity in the past not only for their needs but to help children and grandchildren.”

Loans often backed by FHA

About 9 of every 10 reverse mortgages taken out are loans backed by the FHA. Because the federal government insures them, lenders can only consider equity less than $362,790 in calculations to determine the size of the reverse mortgage — a limit that applies in Sonoma County and other high-cost regions.

Yet, the limit is high enough for most Sonoma County homeowners. About 90percent of Exchange Bank customers who take out reverse mortgages prefer the FHA-backed one, said Padi Selwyn, a bank spokeswoman.

To get a bigger reverse mortgage, one in 10 borrowers take out a jumbo loan. These loans carry higher interest rates because investors consider them more risky, since they are not backed by the federal government. They are becoming more popular, though, as homeowners seek larger loan amounts and lenders step in to meet the demand, mortgage brokers said.

“There are people who need them. There are others who are still working who need more cash flow,” Bencze said.

In response to growing demand for reverse mortgages, Exchange Bank began offering the loans two years ago.

“Once customers began inquiring, we felt it was the right time to become active in making reverse mortgages available. We have conducted seminars to educate those interested in how reverse mortgages work and to help customers determine if the product is right for them,” Selwyn said.

The numbers are expected to grow. Retirees largely want to stay in their homes and remain near familiar community and health care services rather than sell and downsize in a new area. But living expenses are rising.

“People are just more pinched financially,” Belling said. “For many people, the home is the only place they have it tucked away.”

You can reach Staff Writer

Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.