A perfect case for a reverse mortgage

Question: Perhaps the elderly woman who could not afford the increase in her condo fee but wished to stay in her condo should investigate a reverse mortgage?

P.W., Everett

Answer: Last week I ran a column about a woman who owned her condominium unit free and clear and is living on a fixed income. She was very upset because she had just learned that her monthly homeowner's dues were being increased and the extra housing expense was high enough to drive her out of her home.

She asked if there was anything she could do to prevent the monthly fee increase, and I explained that condominium rules require all homeowners to bear a proportionate share of the maintenance expense of the property.

A couple of readers, including the one above, sent me notes suggesting that the woman might want to consider using a reverse mortgage to stay in her condo instead of selling it. They are absolutely right, and I should have made that recommendation myself, so consider this an addendum to last week's column.

First, a quick explanation of how a reverse mortgage works. A reverse mortgage is a special loan program which allows older homeowners to pull cash out of their home without making payments. As its name implies, a reverse mortgage is the opposite of a regular mortgage. Instead of borrowing a sum of money and paying it back over time to reduce the debt, with a reverse mortgage, a sum of money is given to the borrower but no payments are made and debt grows larger and larger each year.

The equity can be pulled out of the home either in one lump sum or paid out gradually in guaranteed monthly payments for life. The unpaid interest is added to the loan balance each month. The total loan balance, with accumulated interest, is eventually paid off when the home is sold, typically after the owner's death.

The amount of money that can be borrowed on a reverse mortgage is determined by four factors:

* The value of the home.

* The number and age of the homeowners.

* The interest rate.

* The maximum allowable loan limit, which is determined by the type of reverse mortgage selected and the average value of homes in your county. Snohomish County is considered a high-value area, so reverse mortgage limits are higher here than in low cost areas such as rural Eastern Washington.

To make sure that homeowners don't outlive their equity, the loan-to-value ratio is based on the borrower's expected life span. To qualify for a reverse mortgage, the borrower must be at least 62 years old, and the older the borrower, the larger the allowable loan amount because their expected life span is shorter.

For example, a 62-year-old borrower with $250,000 in equity could borrow about $110,000 on a reverse mortgage, while a 76-year-old borrower with the same amount of equity could borrow about $149,000.

It can get a bit complicated, so it's best to work with a loan officer who specializes in the reverse mortgages. For example, Lee McCutcheon at Seattle Mortgage (800-233-4601) has been doing reverse mortgages for 10 years, which is almost as long as the program has been available. This unique financial tool has become increasing popular over the years. McCutcheon says the number of reverse mortgages processed by his office has quadrupled since he started doing them in 1996.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.