Elderly tap equity for financial turnaround FINANCE House-rich, cash-poor seniors are using reverse mortages to maintain financial freedom

Anne Murray no longer has to pinch pennies.

For many years she has lived on Social Security and a small pension. Much of what she had, she put into the four-story, century-old house in eastern Duluth she's owned since 1965.

At age 83 she is fit and, because her siblings lived well into their 90s, she believes she will have a long life, too. "I don't always want to be robbing Peter to pay Paul," she said. "I want my last years to go out with a bang."

Murray's house is now repaying her for more than four decades of care, providing her with monthly checks and a nest egg on which she can draw for emergencies, such as replacing a broken water heater.

A reverse mortgage -- an arrangement allowing a homeowner age 62 or older to tap into home equity -- provides her with both cash and a line of credit. And she won't have to pay it back during her lifetime unless she leaves the house.

Here's how it works: You borrow against the equity in your home, paying an interest rate that's similar to what you'd pay on a "forward" mortgage -- a mortgage that you would use to buy a house.

There are some differences, though, between the two types of mortgages. Reverse mortgage interest

rates are adjustable, not fixed as they are on many forward mortgages. The rates, however, are "pretty comparable with what you'd pay with a forward mortgage," said Denise Hinnenkamp, a mortgage loan officer at WesternBank in Duluth.

There also are hefty fees and closing costs, but they're often financed into the loan. On a $154,000 house, for example, you'd pay about $7,800, according to Mary Schindler of Catholic Charities in St. Cloud, Minn. She counsels seniors all over the country about reverse mortgages.

Before a reverse mortgage is approved, you must talk with an approved counselor such as Schindler, who works independent of lending institutions, to make sure youunderstand the process and its consequences. The counselor explains the ins and outs of reverse mortgages as well as other alternatives.

Your age, the value of your house, interest rates and lending limits factor into how much money you can take out of your home equity. One aspect that delights seniors, Schindler said, is that they and their heirs will never have to pay back more than the value of the house. The owner continues to hold the title.

You can spend the money on anything, even building an investment portfolio.

Also, the money received from a reverse mortgage doesn't affect Social Security or Medicare payments.

Although reverse mortgages have been around for years, they have becomepopular only recently. Hinnenkamp said 10 to 15 people a month take out reverse mortgages from her bank.

When Catholic Charities in St. Cloud began reverse mortgage counseling in 1996, about five people came in each year, Schindler said. Now she talks to about four a day, including people from Duluth. Some 74 percent of those who go through counseling get the loans, she said.

Nationally, the Department of Housing and Urban Development reports an 83 percent increase in reverse mortgages from a year ago.

In Duluth, Wells Fargo and WesternBank offer reverse mortgages.

Marsha Edgerton, a reverse mortgage consultant at Wells Fargo, said borrowers generally fall into three categories:

-- Those on fixed incomes who need the money for day-to-day living expenses.

-- Those who are better off and want to do things such as fix up their house or help their kids.

-- Wealthier people who want to take the money out of their house to invest it another way.

In addition, she said, "I'm seeing much more of a growing interest in people who are planning on retiring."

The money from a reverse mortgage can be paid in a lump sum, monthly installments, a line of credit or in a combination of those ways.

Pat Rapp, 75, of Duluth struggled to pay medical bills and mortgages on the house she's owned for 35 years after her husband, Bruce, died a while back.

Without his Social Security check, she couldn't make ends meet. "It was unreal. I was getting to the point where I was getting physically sick," she said.

One alternative recommended to her was to sell her home, but it had been her parents' house and she had strong emotional ties to it. When she heard aboutreverse mortgages, she decided that was the way to go.

She has used the money to pay off mortgages and medical bills. Her house also needed repairs and thereverse mortgage will take care of them.

"I would recommend it to anybody who has financial difficulties," she said.

Joyce Johnson, 64, a Cloquet retiree, said paying her mortgage left only about $200 a month from her pension and Social Security checks. Her brother recommended a reverse mortgage.

She took a lump sum and was able to pay off her forward mortgage, buy a new car with cash and have a new ceiling put into her breezeway. Plus, she put a big chunk of money into a certificate of deposit.

Now she can handle her bills. Johnson still has to live within her means, but "I've got a cushion now," she said. "It's been a godsend to me."