Specialized, not predatory loans for seniors on fixed income

Dear Ms. Mortgage Maven,I am a senior citizen and almost had my home paid off when I applied for a $50,000 loan to pay for a new car and some other things. Now every month the mortgage company sends me a statement, and every month the amount that I owe is growing and growing. I now owe almost $90,000 and they only gave me $50,000. How can they do this to me? I am afraid that it was one of those predatory loans and the bank will end up owning my home. I live on a fixed income ($900/month) and do not want to lose my home. I want to refinance this predatory loan. What can be done about these predatory lenders?

- Ms. A

Dear Ms. A:

The loan you have is very good for someone in your situation. It is a Federal Housing Administration (FHA) reverse mortgage. It was designed specifically to enable senior citizens to access the equity that has built up in their homes over the years, while allowing them to live in their homes and not make a monthly mortgage payment. The most common form of a reverse mortgage is one in which the bank pays you a monthly mortgage payment for an increasing interest in your house. What you have is slightly different; you have two separate components, a lump sum payment and a line of credit.

I contacted several FHA reverse mortgage specialists to answer your question and everyone agrees: you have a loan widely considered to be ideal for someone in your circumstances. It is not a predatory loan. No bank is going to come take your house. And last, but very important, I do not think you should refinance this loan to pay it off.

You said you have a fixed income of $900/month. According to the documents you sent me, this loan gave you a lump sum payment of $50,000 and a home equity line of credit that now has over $115,000 in it. That's $115,000 for you to spend how you see fit: to go on a vacation, cover medical costs or have on hand in case your house needs repairs. If your roof leaked now, with $900/month, how would you pay to have it repaired or replaced?

I can understand your concern that a predatory lender is coming to get you. Since you are not making a monthly payment, the interest is being added to the principal balance that has to be paid back. A monthly maintenance fee and FHA mortgage insurance fee are also being added to the principal each month. Generally, the principal is repaid when your heirs sell the house after your death. If you live a longer than the actuarial tables predict, you could owe more than the value of your house. In that case, your heirs will pay off the loan with the proceeds from the sale of your home. If the balance owed is greater than the proceeds received from the sale of the home, the lender will collect the additional monies owed from the mortgage insurer - that is why you are paying the mortgage insurance every month.

The costs associated with the loan are higher than those associated with a traditional loan, but you did not get ripped off. FHA reverse mortgage loan costs are established by the government. Every lender who does this type of loan would have charged you the same fees. Also, the lender is not permitted to inflate the interest rate, which is also set by the government.

Please do not refinance this loan. If you refinance it, you will have a mortgage payment to make every month, and you will no longer have access to the $115,000 line of credit that you can use without ever having to make a payment.

In your situation, this loan is really a blessing. The equity in your house is your money that you now have access to spend as you see fit. Unless your children have $115,000 lying around, ready to give to you should you need it, where else are you going to get that kind of money? With your current reverse mortgage, you have more money than your $900/month retirement income - and no one will come take your house from you.

For more information on reverse mortgages, go to www.reversemortgage.org or call AARP at 1-800-209-8085. Sincerely.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage lender in Fort Washington, MD. Call her with your questions 202-607-4449 or email her at Jessica@msmortgagemaven.com and you may get your question answered in this column.