More homeowners revert to reverse mortgages

For about a year, Peg Cowan pored over information about reverse mortgages, determined to fully understand what they are before deciding whether to take one out.

Reverse mortgage
Richard and Peg Cowan took out a reverse mortgage on their home in Superior. Derek Montgomery /

For about a year, Peg Cowan pored over information about reverse mortgages, determined to fully understand what they are before deciding whether to take one out.

On one hand, she was concerned about committing to a mortgage arrangement she knew little about. But she knew that tapping her home's equity could help her and her husband, Richard, renovate the exterior of the Superior home where they've lived for about 35 years.

In the end, after researching and talking with a reverse mortgage counselor, she decided it would be worthwhile. The Cowans took out the reverse mortgage, paid off the "forward," or standard, mortgage on their two-bedroom house with some of the money, and they still had plenty to spend on improving the exterior and save for a rainy day.

The best part is that they don't have any monthly mortgage payments. "I'm not sorry I took out a reverse mortgage," Peg said recently, adding that she is "very satisfied."

Like everyone who takes out a reverse mortgage, the Cowans will have to repay the amount they borrowed -- with interest -- when they sell the house.


If they still live there when they die, the estate will repay the loan. In either case, the amount paid back won't exceed the value of the house.

Reverse mortgages have become increasingly popular nationwide. Last year the number of federally insured reverse mortgages grew 6.4 percent to 115,176 loans nationwide, according to the National Reverse Mortgage Lenders Association. And the number of lenders that originated the loans grew 76.5 percent.

The numbers in Minnesota show interest has grown. Deb Peterson, mortgage banking manager at WesternBank in Duluth, said although it wasn't a record year, reverse mortgages were up 50 percent at her bank in 2008.

M&I Bank and Wells Fargo also report increases in the Twin Ports area. The number of originations in Minnesota slipped somewhat in 2008, but the trend has generally been upward. Since fiscal year 2003, nearly 5,700 Minnesota homeowners have taken out reverse mortgages.

Jeff Taylor, senior products group vice president at Wells Fargo, said his bank is seeing an increase in the number of couples as well as people in their 60s taking out reverse mortgages. The lower age limit is 62, but generally customers have been in their 70s or 80s in the past.

Kim Miller, a reverse mortgage counselor for Lutheran Social Service of Minnesota, said some seniors whose investments have declined are looking to their homes for income and investigating reverse mortgages.

The limit on home values for reverse mortgages recently rose to $417,000 from $200,160. Depending on age, home value and current interest rate, a reverse mortgage can provide homeowners 50 percent to 85 percent of the home's equity.

Another major change is that seniors can purchase a new residence with a higher value than their former home with proceeds from the home sale combined with a reverse mortgage on the new home.


For example, if a homeowner wants to sell and move into a condominium -- but the condominium costs more than the home sold for -- a reverse mortgage on the condo and a down payment with money from the house can pay the entire cost of the condo. The owner won't have any monthly mortgage payments. "That gives [homeowners] the housing that most accurately reflects their needs," Michael Odden, vice president and state mortgage manager for M&I Bank in Wisconsin, said in a phone interview from his Madison office.

Everyone who takes out a reverse mortgage must first have a session with a neutral reverse mortgage counselor. "I've counseled a lot of people from the Duluth area," Miller said.

Although the loans allow financial independence and have kept many people in their homes, the costs are high, Miller warned. Though interest rates are currently low -- 2.3 percent to 3 percent for adjustable rates -- they eventually could adjust as high as 12.5 to 13 percent. Fixed rates are in the 6 percent range.


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