Many Choose to Go in Reverse (Mortgage)

REVERSE mortgages have been a boon to older homeowners, as well as the mortgage industry. But the product’s popularity has brought some complications.

Reverse mortgages allow people age 62 and older to draw on the equity in their primary residences, with monthly payments that continue as long as the borrower remains in the home.

People have migrated in record numbers to such loans, according to the Reverse Mortgage Lenders Association, a trade association in Washington.

Borrowers last year took out nearly 86,000 Federal Housing Administration home equity conversion mortgages, the dominant reverse mortgage product, compared with just 48,500 in 2005.

In fact, the loans have grown so popular that they run the risk of outstripping federal limits. As of last week, mortgage industry officials said they feared they would be forced to suspend their federal reverse mortgage programs because the government had agreed to insure only 275,000 such loans — a number that is rapidly being approached.

Peter H. Bell, president of the National Reverse Mortgage Lenders Association, said it was likely that Congress would lift the loan limit, at least temporarily, by the deadline, which is Feb. 15. “We’re moving along, but I won’t breathe easily until it’s passed,” Mr. Bell said.

Mr. Bell said lenders were issuing reverse mortgages at a monthly rate of about 8,000, compared with roughly 6,000 a year ago. “The product is somewhat counterintuitive, and as a result some people are leery about it,” he said. “But as more people have these loans, more people know someone who has one, which fuels the growth.”

A 62-year-old homeowner in Larchmont, N.Y., with a $240,000 house that has been fully paid off can qualify for a lump-sum payment of $104,000 or monthly tax-free payments of $650 under the federally insured Home Equity Conversion Mortgage.

The monthly payments continue as long as the borrower lives in the house, even if those payments exceed the overall value of the home. In those cases, he or his estate need repay an amount equal only to the home’s value. Otherwise, the borrower or his estate repays the amount loaned, plus interest.

Payouts are based on a home’s location and value, current interest rates, a borrower’s age and the amount of equity he or she has in the house.

There are potential downsides to these loans. For instance, closing costs, which are wrapped into the loan, are comparatively high, so borrowers who might move within a few years might wish to find other alternatives. These and other issues are covered in free, but mandatory, financial counseling sessions borrowers must complete before receiving a reverse mortgage. (Web sites like AARP’s cover some such issues, at AARP.org/money/revmort/.)

As reverse mortgages have grown more popular, lenders have begun creating more types of these loans. For instance, the Seattle Mortgage Company last year rolled out a line of jumbo reverse mortgages, which allow larger payouts but at typically higher interest rates. These new jumbo reverse mortgages allow borrowers to refinance the loan after one year with no penalties, which is sooner than some competitors.

Meanwhile, the BNY Mortgage Company, a joint venture of EverBank and the Bank of New York, last month introduced the HECM 100, a reverse mortgage with an interest rate that is 0.5 percent lower than the bank’s previous products.

Joseph DeMarkey, a BNY Mortgage vice president, said the lower interest rate meant that a 70-year-old in a $300,000 home can receive about $13,000 more from the loan over its typical lifetime.

The New York-area market for reverse mortgages, Mr. DeMarkey said, has been consistent with that of the rest of the country. “It’s been tremendous growth,” he said.