Mortgages that pay the Borrower


For Renee Heck, a reverse mortgage has meant a new roof, a new car and satisfaction that she's not a burden to her six children.

"I have a pension and Social Security and I'm a seamstress, but for the big things, there was no money for them and I was reluctant to go to a loan company because you have to pay it back," she said.

A year ago, the Pasadena resident went to Unity Mortgage in Columbia, "asked a million questions," listened to the loan counselors, filled out paperwork and, in September, she signed the final papers for a reverse mortgage.

Her home was appraised at $100,000. She chose a HUD-approved line of credit rather than monthly installments, because she figures that her monthly income is enough for routine bills.

"I'm almost 73. I want to enjoy whatever time I have left," Heck said. "The first thing I did was pick out a new, '96 Ford Contour. There are no buses here, and I need a car, even to go to the store."

Heck can use her line of credit for anything she wants, with no questions asked by the lender.

She can pay back the amount she takes out, so each year her property appreciates, her line of credit increases with it.

"It's the best thing in the world," she says. "I'm not a burden to my children; I'm independent."

Reverse mortgages, designed for homeowners age 62 and above, reverse the direction of mortgage payments -- a way to borrow on home equity without transferring ownership to the lender or having to pay the amount back in cash during the owner's lifetime.

The American Association of Retired Persons estimates that 15,000 government-insured reverse mortgages have been issued, along with 5,000 to 10,000 privately written reverse mortgages.

There are three basic types. The lender can pay the owner a

lump sum, a monthly installment, or allow the owner to use a line of credit based on the home's appraised value.

Some lenders will combine the three.

The line-of-credit option is the most popular. AARP officials say most seniors who get the mortgages already have some type of monthly income and want the credit, as Heck did, for medical emergencies or major repairs and purchases.

Interest is added to the principal loan balance each month. The total interest you would owe increases significantly with time, as the interest compounds.

The rate can be fixed or adjustable within a certain range.

A reverse mortgage differs from a home equity loan because no repayment is required until the homeowners leave the house as their principal residence (such as when they go to a nursing home) or die. The house is used as collateral, however.

When the owner dies, the lender does not take title to the home, but heirs usually pay off the principal and interest either by refinancing the reverse mortgage into a forward mortgage or by using the proceeds from the home's sale.

The average customer is 76, and most are widows. They tend to be "house rich and cash poor," according to AARP officials. The Federal Trade Commission classifies three basic types of reverse mortgage: government-insured, lender-insured and uninsured.

The FHA-insured reverse mortgages may provide smaller loan advances than lender-insured plans, and FHA loan costs may be greater than uninsured plans because you get government backing and insurance for the loan.

Lender-insured plans offer monthly advances, or advances and a line of credit. Additional loan costs can include a mortgage insurance premium and other fees.

Advances from a lender-insured plan can be larger than with FHA loans. They also may allow you to mortgage less than the home's full value. But these loans may cost more -- leaving you with less equity over time.

Some lender-insured plans include an annuity that continues making monthly payments to you even if you sell and move. Annuity payments may be taxable and affect eligibility for Supplemental Security Income (SSI) and Medicaid, FTC officials warn.

Uninsured plans vary dramatically from government-backed or privately insured types. The uninsured plan provides monthly loan advances for a fixed term only -- a fixed number of years that you choose when you take the loan. That makes them good for short-term, large-cash needs.

Customers need to be careful when setting the monthly payment amount and calculate how they'll repay the loan when it's due. They also need to know how much equity will remain after paying the loan.

FTC officials warn that if you don't do the homework, you could have to sell your home to pay the loan back.

Sometimes it pays to be older when taking the monthly installments, because you get bigger checks from the lender, who takes into account life expectancy when calculating the amount to be paid each month. And if you outlive the actuarial tables, you can profit as long as the term of the monthly payments isn't capped by the lender.

The FHA has renewed its popular Home Equity Conversion Mortgage (HECM) after a short lapse and the Federal National Mortgage Corp. (Fannie Mae) has launched its "Home Keeper" reverse mortgage, which is expected to spark much more loan volume.

The U.S. Department of Housing and Urban Development has also passed new regulations that speed up paperwork and approvals by allowing most of the approval process to be done at the broker level.

According to the National Center for Home Equity Conversion of Apple Valley, Minn., the FHA's Home Equity Conversion Mortgage (HECM) provides the most cash for the lowest cost if the home's value is near or under the area's median value.

The Home Keeper is expected to become the most widely available reverse mortgage. It will be marketed through Fannie Mae's network of lenders. Home Keeper, which allows lines of credit or monthly payments, will also make higher payments to owners of homes that exceed equity limits set by HUD.

Under the HECM program, for example, the total amount of a homeowner's loan is based on equity limits that range from $77,000 to $152,000 -- even if the home is worth more. Fannie Mae's program now expands the limit to $203,150. The typical reverse-mortgage home is worth $110,000.

Even with all the expectations about Home Keeper, reverse mortgages are not and may never be as red-hot as some lenders would like. Patricia Wills, regional manager of Unity Mortgage, one of the region's largest reverse mortgage companies, says many seniors, having paid their home loan, still don't like the word "mortgage" and shy from the idea.

"Getting a mortgage is a sign of failure," she says. "They think they're giving up the house, or they want to pass the house to the kids."

"If a person has very strong feelings about leaving unencumbered property, there is a lien with the loan that needs to be paid," agreed Laura Barriere, manager of housing initiatives at Fannie Mae. "There's no requirement it be sold, but the heir has the option to take out a loan to pay off the debt."

Bromwyn Belling, housing specialist at the AARP Foundation, said, "We've gotten more mail with questions about reverse mortgages than any other issue for years." The association supports reverse mortgages and provides lists of participating lenders, though it won't recommend any particular lender.

Belling advises seniors to remember that they can "deplete a major asset." Before signing anything, seniors should investigate investment options and local and state programs designed for seniors, such as property tax breaks, prescription drug programs and housing department home-repair loan programs.

"Some people discover in counseling that there are many other programs that meet their needs," Belling said. "Do your homework and get to know all the services and programs that a state offers."

"It is a mortgage," Barriere said. "You pay closing costs and there are upfront costs. It may not be best for someone who only has short-term needs or won't stay in the home more than a year."

AARP officials also urge seniors to look at total costs carefully, because loan fees and interest rates can easily chisel down the bottom line, especially if you stay in the house only one or two years after taking out the reverse mortgage. Sometimes the fees and interest rates -- based on the full loan amount and appraised value of the home -- add up to $10,000, Belling said.

(On the other hand, if you outlive the lender's life expectancy statistics, you can incur a negative interest rate if the lender doesn't cap the years of payment).

"It's a relatively expensive way to borrow," Belling said. "There's likely to be improvements with products and features."

Although getting a reverse mortgage may wind up removing the home from the estate, attorney H. Mark Bobotek, whose Baltimore-area legal practice includes a lot of estate work, advises older homeowners to look out for themselves.

"It's nice to care for the kids, but make sure you're cared for first," he said. "It may be an appropriate tool for those on a lower income."

"They're best for someone who plans to be there a long time because the costs are spread over a longer period," Wills said.

"But I've done many loans where people used this, knowing they'd move, but they needed the money for in-home care to avoid a nursing home."

Fannie Mae officials recommend checking with a benefits specialist at one's local agency on aging for Medicaid, AFDC and food stamps eligibility requirements. Usually, a reverse mortgage won't get you kicked out of the programs, but it's best to check your particular case.

Some seniors opt to add an annuity to their reverse mortgages. It costs extra, but it guarantees that if you move out of the house you still get money as long as you live -- so if you go to a nursing home, the mortgage ends but the income continues.

Current disclosure laws mandate that all lenders display the total annual percentage rates and payment terms, using a uniform formula to calculate the total annual loan cost (TALC).

Lenders also have to provide prospective borrowers a table showing the projected TALC, over time, for each reverse mortgage. With credit lines, lenders must inform you of any charges to open and use the account, such as an appraisal or attorney's fee.

Though reverse mortgages can be expensive, nobody's heard of many outright fraudulent schemes yet. There is one report of someone charging a fee for supplying information about types of loans. That is public information and free.

Call Fannie Mae at 1 (800) 7FANNIE, or the AARP for a list of participating lenders, literature and counseling. Volumes of data are also available over the Internet. For more information, try http: /

Are you eligible

* Borrower and co-borrower must be at least 62 years old

* Home must be a single-family home

* Condominiums and cooperatives not eligible

* If federally aided, you must attend a counseling session on reverse mortages

* Home must be clear or very low debt repayment

* Maximum loan limit is $203,150


Pub Date: 7/14/96

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