John Spencer Sr. came close this fall to losing the Lancaster rowhouse he's lived in for the past 27 years to a sheriff's sale for unpaid property taxes.
"I got quite a few notices, and it was down to the wire," the 81-year-old homeowner said.
But instead of having to move in with one of his children, Spencer is now planning to stay in his house on Rockland Street for many more years, thanks to a line of credit from the bank.
He is among a growing number of older people these days who are trading in equity they've accumulated in their homes for cash in a transaction called a reverse mortgage.
Unlike home-equity loans, which require borrowers to gradually repay the money, reverse mortgages are not repaid until the borrower dies or moves out, usually through proceeds from the sale of the house.
Spencer credits Julie Didyoung, a reverse-mortgage specialist at Fulton Mortgage Co., with saving him from being put out on the street.
"She really moved it fast or I wouldn't have made it," he said.
Didyoung said Fulton Financial Corp., the parent of Fulton Bank and Fulton Mortgage, decided to start handling reverse mortgages a little more than two years ago because so many of its older banking customers were asking about the product.
"They did not trust to call an 800 number from a TV commercial to do it," Didyoung said. "They trusted the bank where they had always done business."
Fulton Mortgage has made about 150 of the loans since then, and its staff of reverse-mortgage specialists has grown from just Didyoung, who now focuses on Lancaster, York, Dauphin and Lebanon counties, to a total of four, who together cover Fulton's entire five-state footprint.
Fulton both originates and services the loans, which are all insured by the Federal Housing Administration, but the loans themselves are held by other financial companies that specialize in the product.
The bank is a member of the National Reverse Mortgage Lenders Association, as are several other banks with local branches — M&T, Sovereign and Wells Fargo. Other banks also offer the loans on a limited basis or through affiliated companies.
Susquehanna Bank, for instance, does sometimes handle reverse mortgages, but they are a very small portion of its overall mortgage business, according to Stephen Trapnell, Susquehanna's corporate communications officer.
Cost rolled into loan
Reverse mortgages aren't for everyone, Didyoung said. They are expensive, typically costing the borrower between 5 and 6 percent of the home's value in closing costs along with cumulative variable-rate interest, $25-$35 monthly servicing fees and annual FHA insurance payments equal to half a percent of the loan's value.
But none of that cost comes out of the borrower's pocket; it all comes out of the equity accumulated in the home, relieving the owner of monthly mortgage payments and in many cases providing a line of credit or monthly payments the owner can use to cover property taxes, health care costs and other expenses. And interest doesn't start accumulating until the owner actually takes possession of the money.
Although everyone listed on the home's deed must be 62 or older to qualify for a reverse mortgage, there is no typical borrower, Didyoung said.
"We're working with people who are in $60,000 houses and people who are in $600,000 houses," she said. "This is most commonly thought of as for people who are cash poor and property rich, but there are also some savvy things people can use this for."
She's had customers take out a reverse mortgage on their primary home so they could buy a vacation condo in Florida, giving them two places to live with no mortgage payments on either property.
She's also helped people downsize, allowing them to reserve a portion of the proceeds from the sale of the original home to augment their retirement income, and the rest combined with a reverse mortgage to buy a smaller home, leaving them with no mortgage payments.
Some couples use the reverse mortgage as a financial planning tool, she said, waiting to draw on any of the proceeds until illness or the death of one of the spouses makes it necessary.
Having that money available can help the surviving spouse pay for home health care and maintenance costs, allowing them to stay in the home longer and save money in the long run.
The reverse mortgage itself doesn't have to be repaid until after the last person leaves the house.
Other people use the reverse mortgage to pay off the remainder of their original mortgage, relieving them of the burden of monthly payments.
John and Jane Doe, a couple in Manheim who don't want to be identified by their real names, say they took out their reverse mortgage so they could pay their property taxes after their 401(k) savings plummeted.
"When the stock market fell, we pretty much lost it all, along with 50 million other people," Jane Doe said.
"We researched this [reverse mortgage] a lot before we did it," she said. "We owned our house. We let it work for us. ... Whenever we want money, we can get it."
Age plays a role
The older homeowners are, the larger the payment they can qualify for from a reverse mortgage.
The Does, who are both still in their 60s, were able to get a $52,000 reverse mortgage on their $180,000 home in the form of a line of credit.
"My 62-year-old customer is completely different from my 80-year-old customer," Didyoung said. "I have done this for someone the day after they turned 62. The oldest was 98."
Spencer, for instance, worked well into his 70s, finally retiring from his last full-time job in 2004. He'd still be working part time, he said, if his health problems, which have included prostate cancer and a couple of strokes, didn't make it so difficult to find another job.
Reduced to Social Security for living expenses and beset with medical bills from his own illnesses and his wife's battle with breast cancer before she died in 2007, Spencer was unable to pay his property taxes.
Although his house is worth only $65,000, the reverse mortgage paid off the debts on the home and some other bills, and left him with a $12,000 line of credit he can use to supplement his retirement income to keep up with his taxes and home maintenance.
"It also gives me something to do," he said. "I'm trying to get [the house] up to par. ... I'm a little slow, but I've got a lot of motivation."
The way Spencer looks at it, the longer he can stay in the house, the more value he'll get from the reverse mortgage.
"With that thought in mind, I'm going to live to be 100 years old, at least," he said.
Reversing red flags
Although appropriate for many people, reverse mortgages have been subject to abuse, and stories abound of cases in which older homeowners were steered into alternate products in which they signed over deeds to their property or were persuaded to transfer the reverse mortgage proceeds into questionable investments.
To protect elderly people from these abuses, lenders are required to make sure borrowers receive counseling from qualified independent agencies.
This fall, the FHA tightened those rules to require reverse-mortgage counselors to pass an exam developed by the AARP Foundation.
The rules require counselors to receive training every two years and to test the people they are counseling to ensure that they have absorbed the information.
Didyoung said she provides prospective borrowers with a list of 10 agencies they can contact for help. Some charge a fee of up to $125, which can sometimes be rolled into the mortgage. Some will provide the counseling for free.
A typical session takes from 40 minutes to a couple of hours, she said.
Counselors are required to provide borrowers with information about alternatives to taking out a reverse mortgage.
If homeowners are in extreme financial straits, Didyoung said, they may be able to sustain themselves without reverse mortgages through food stamps, Medicaid and property-tax rebates. Counselors are trained to provide that information.
If the homeowners have enough income to make payments, a home-equity loan may provide a cheaper way to raise a large amount of needed cash.
And in some cases, staying in the house might not be in the best interest of the homeowners, and they might be better off selling it.
After the counseling, the agency has to provide the lender with a certificate to show that the borrower passed the exam.
Another potential pitfall to a reverse mortgage is conflict within a family over the parents' decision to cash out the equity in the home rather than pass it on to their heirs.
Often, with rising appreciation in home values, there will still be money left over after the home is sold, but the reverse mortgage must be paid off first.
Should the homeowner enjoy an especially long life and interest costs balloon past the value of the home, the FHA insurance kicks in to make up the difference.
"These are nonrecourse loans," Didyoung said. "No other asset can be touched to pay back the loan."
Didyoung said Fulton encourages borrowers to involve their children when considering reverse mortgages.
"Roughly 40 percent of the time when I get the first phone call, it comes from one of the children," she said.
Many homeowners can afford to take their time in deciding whether to take out a reverse mortgage, and Didyoung said she often consults with borrowers three or four times while they're deliberating the idea.
Fulton's reverse-mortgage specialists are salaried rather than paid by commission, she said, so they have no incentive to rush borrowers into a decision.
"Last December [2008], three-quarters of the loans I closed were for people I'd been talking with a year before," she said.
Unraveling reverse-mortgage riddles
Here are some common questions people have about reverse mortgages:
I'm older than 62, but my spouse is not. Do we qualify for a reverse mortgage? No, every person whose name is on the deed must be at least 62.
Does my home have to be paid off before I apply? No, but you need enough equity in it that all the mortgages and liens against it can be paid off when the reverse mortgage closes.
Can I get a fixed interest rate for a reverse mortgage? Yes, but only for a lump-sum payout at closing. Didyoung said the current rate is just over 5.5 percent. Monthly payment, line-of-credit and combination options require variable-rate financing, which is currently just below 3 percent. The rate varies according to the London Interbank Offered Rate, or LIBOR, but increases are capped at 10 percentage points above the originating rate, which would currently be just below 13 percent.
Do I have to pay cash for closing costs? No, those are usually paid from the proceeds of the mortgage at closing, but you will be responsible for interest on those costs until the mortgage is repaid.
Does the reverse mortgage take care of property taxes and homeowners insurance? No, you will have to pay for those and keep up the property yourself.
Do I have to turn over title to the property? No, the home remains yours until it is sold or passed on to your heirs.
Will I still be able to use the property as collateral for another loan? No, it would be very unlikely that you would be able to find a lender willing to take a third position on the property behind the reverse-mortgage lender and federal government.
Would I lose my line of credit or monthly payments if the reverse-mortgage lender were to go out of business? No, in that case the FHA insurance would kick in to guarantee you still receive full payment from the mortgage.
Does the mortgage have to be repaid immediately after I am no longer able to live there? No, the home is considered your primary residence until 12 consecutive months have passed in which you did not live there or until you die. Then, you or your heirs have a year to sell it for at least 95 percent of its appraised value (actually, six months with two virtually automatic three-month extensions).