The pros and cons of reverse mortgages: they provide supplemental income for seniors and are available in Alaska.

As America's aging population advances closer to retirement, reverse mortgages are becoming more popular with seniors needing to enhance their financial resources.

This special type of loan allows homeowners who are at least 62 to transform their equity into cash without having to leave their homes. Reverse mortgages can be applied to single-family homes, qualified condominiums, town houses, manufactured homes, and one- to four-family owner-occupied residences. The cash received from the loan is tax-free. And borrowers can spend the money on whatever they want: living expenses, medical bills, home improvement and repairs or even travel.

Reverse mortgage payments can be received through one lump sum payment, monthly installments, a line of credit or a combination of fixed monthly income and a line of credit. No matter how the loan is paid out, it doesn't have to be repaid until the borrower passes away, sells the home or permanently moves from the residence. And because a reverse mortgage is non-recourse loan, the repayment amount can never exceed the value of the property.

"A lot of folks think it's probably too good to be true.... There's no other mortgage product like this in America," says Jeff Taylor, vice president and national program manager for senior products at Wells Fargo Home Mortgage. One of the few financial institutions offering reverse mortgages in Alaska, Wells Fargo is the largest retail originator of reverse mortgages in Alaska and nationwide.

Many seniors, Taylor says, are using reverse mortgages to create cash flow. They use a reverse mortgage to pay off their mortgage balance and weave the unused portion into a line of credit. "It grows annually at the same interest rate of the outstanding interest on the loan," adds Taylor, who is based in Greensboro, N.C.

QUALIFYING FOR A REVERSE MORTGAGE

Clearly, a reverse mortgage works very differently from the traditional type of home loan. In a typical mortgage, a home owner pays a monthly amortized amount. With each payment, the owner has more equity in the house. After a certain amount of time-typically 30 years--the mortgage will be paid in full and the property released from the debt.

With a reverse mortgage, the home owner pays nothing each month, and all interest on the debt is added to the lien on the property. If the owner receives monthly payments, then the debt on the house increases each month.

"The whole concept is that the lender is paying you and that balance on that loan is growing," explains Sue Benedetti, vice president of First National Bank Alaska's Home Loan Center. First National currently isn't offering reverse mortgages, but it is "seriously considering" providing these special products to meet the needs of Alaska's rapidly expanding senior population, according to Benedetti.

Unlike with traditional mortgages, loan approval for a reverse mortgage isn't based on criteria like income and credit. Instead, eligibility depends on two main factors: age and home ownership.

Generally, the amount that can be borrowed depends on the value of the home, the amount of available equity, and the borrower's age at the time of loan application. The older the senior, the more he or she can borrow. For example, based on a loan with an interest rates of approximately 9 percent, and a home qualifying for $100,000, a 65-year-old could borrow up to 22 percent of the home's value; a 75-year-old could borrow up to 41 percent of the home's value; and, an 85-year-old could borrow up to ,58 percent of the home's value. The percentages don't include closing costs because these charges can vary.

For potential borrowers who are wondering exactly how much they could get with a reverse mortgage, Wells Fargo has an easy solution. Its online calculator at www.wellsfargo.com/reverse takes the borrower's age, zip code and home value and instantly estimates the appropriate qualifying amount.

TYPES OF REVERSE MORTGAGES

There are three kinds of reverse mortgage plans available today: federally insured, lender-insured and uninsured. The most popular type is the Home Equity Conversion Mortgage (HECM), which accounts for 90 percent of all reverse mortgages originated in the U.S. HECM loans are insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. The interest rates are adjusted monthly or annually, depending on the borrower's choice. And the rate is determined using an index called the weekly regulated "One-Year U.S. Treasury Constant Maturity Rate."

In recent years, growth in the HECM program has been very rapid. During the federal fiscal year ending Sept. 31, 2005, 43, 131 HECM loans were issued-an increase of 14 percent over the prior year, according to HUD. As of Dec. 31, 2005, a total of 195, 418 HECM loans had been issued since the program began in 1989. Wells Fargo, incidentally, was the largest originator of HECM loans in 2005.

"We're on pace to blow through that record and will probably endorse 65,000 nationally in fiscal year 2006," Taylor explains. "The entire industry endorsed 24 loans (in Alaska) in fiscal 2005, with Wells Fargo handling 21 of them. Through May of this year, the industry has endorsed 19, and Wells Fargo has endorsed 18 of those."

The rising popularity of HECMs is causing some concern within the mortgage lending community. Section 255 of the National Housing Act, which governs the HECM program, limits the total number of outstanding HECMs to 250,000. At the current rate that HECMs are being done, the cap could be reached very soon. Efforts are now under way to remove or expand the cap on the number of HECM loans that can be issued.

The other two types of reverse mortgage products are the Fannie Mae Home Keeper loan and Cash Account loan. The Fannie Mae Home Keeper loan was developed in 1996 as a conventional market alternative to the HECM. The Home Keeper was created to serve the needs of individuals with higher property values, condominium owners, and seniors wanting to use a reverse mortgage to purchase a new home.

The Cash Account loan is a proprietary "jumbo" reverse mortgage developed by the California-based Financial Freedom Senior Funding Corp. This loan is designed to benefit homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits.

GROWTH IN POPULARITY

Reverse mortgages have been around since the '90s, with the State of Alaska authorizing them in August 1998. But, until recently, misconceptions have kept reverse mortgages from catching on as a financial planning tool, according to the National Reverse Mortgage Lenders Association. For example, some people mistakenly assume the lender takes possession of or sells the home once a reverse mortgage comes due.

But in fact, homeowners can continue to live in their houses and retain the title throughout the life of the reverse mortgage. When the loan must be repaid, the borrowers (or their heirs or estate) may choose to sell the home and pay off the reverse mortgage, or to keep the home and pay off the reverse mortgage using some other source of funds.

The sluggish economy has been an influencing factor in homeowners gravitating to reverse mortgages. Many people have suffered stock-market losses over the past few years. Steep drops in interest rates have significantly decreased their earnings from money market and certificates of deposit accounts. "Many seniors have watched their retirement investments go down in value," Taylor says. "They're looking for a way to subsidize their retirement or replace what has been lost."

The closing of the Alaska Longevity Bonus Program also increases the need for products like the reverse mortgage, Benedetti says. Since its creation in 1972, the Alaska Longevity Bonus provided Alaskans 65 and older with monthly checks of up to $250. Now without these funds to count on, Alaska's seniors must find other ways to supplement their income. Reverse mortgages help fill the gap.

And now with higher FHA single-family home mortgage limits, seniors may be able to borrow even more money against their houses. In January, the FHA increased its basic single-family home mortgage limits by more than 15 percent nationally. The higher limits not only put more homes within reach of more families across Alaska, but also help seniors seeking the federally insured reverse mortgages to potentially access more equity from their homes, according to Colleen Bickford, Anchorage field office director for HUD.

The increase means a 5.3 percent rise in mortgage limits for a single-family home from $190,000 to $200, 160 for most of the state of Alaska. Areas excluded from the most recent increase are Anchorage, Denali, Juneau, the Matanuska-Susitna valleys, Sitka and Yakutat, which experienced a mortgage limit increase in October 2005. Current mortgage limits for single-family homes in these areas are: $255,050 for Anchorage, $240,264 for Denali, $294,000 for Juneau, $255,050 in the Mat-Su, $327,750 in Sitka, and $240,264 in Yakutat.

"That does not mean that if you have a $500,000 house, you could not do this program," Taylor says. "Rather, you would be limited to the maximum lending limit."

WEIGHING THE PROS AND CONS

Reverse mortgages offer obvious benefits for home-owning seniors. They enable them to cash out the equity in their homes without having to sell or relinquish ownership. This, in turn, helps borrowers maintain adequate standards of living and their financial independence.

A reverse mortgage may be ideal for those with a regular need for supplemental funds, live on a fixed income and have a house as their only asset, and don't plan to leave their home as an inheritance. However, it may not be the best option for every senior, according to Benedetti. "It wouldn't be a good idea if you plan to leave your home free and clear or with equity for your heirs," she explains.

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