Reverse mortgage: Be careful

Nation's Housing

February 25, 1996|By Kenneth R. Harney

WASHINGTON -- Senior homeowners considering applying for a "reverse mortgage" in 1996 need to confront two sobering financial facts about this increasingly popular type of loan:

First, reverse mortgages can be far more expensive than you ever guessed. Effective annualized loan costs in excess of 20 percent are possible in the early years of some programs because of upfront fees.

Second, how much money you actually pocket can vary widely, depending upon which plan you choose.

For example, the reverse mortgage program backed by the federal government allows a maximum credit line of $79,800 for a 75-year-old single borrower living in a $200,000 house. The new Fannie Mae "Home Keeper" plan, by contrast, offers the same individual a more generous maximum credit line of $104,800 -- provided the borrower agrees to share with the lender 10 percent of the home's value when the home is sold.

Reverse mortgages essentially turn the illiquid equity in your home into spendable cash, without forcing you to pay monthly mortgage charges. Under a reverse mortgage, in fact, the lender sends you money via a credit line, a lump-sum payout or monthly checks.

Generally you don't have to pay back the money -- plus interest -- until you either move out of the house or sell it.

Four major reverse mortgage programs dominate the field: The Department of Housing and Urban Development's (HUD) "Home Equity Conversion Mortgage" or "HECM" plan; the "Household" program, sponsored by Household Bank; Transamerica Corp.'s "HomeFirst" plan; and the Federal National Mortgage Association's new "Home Keeper."

The widely acknowledged top American expert on the subject of reverse mortgages, Ken Scholen, head of the nonprofit National Center for Home Equity Conversion, warns of the complexity of reverse mortgages.

For example, according to Scholen, consumers need to understand that each of the four programs has distinct features.The new Fannie Mae "equity sharing" option, for instance, may be attractive to a senior who seeks to convert equity into a significant chunk of quick cash.

A single, 80-year-old owner of a $150,000 house could take a lump-sum distribution of $91,046 on a $150,000 home by agreeing to share 10 percent of the equity in the property after the second year. If the same owner declined to sign up for the equity-sharing option, by comparison, she would be limited to a distribution of $65,941, according to Scholen.

In exchange for these higher payouts, however, there are potentially sizable increases in total costs to the owner -- or the owner's estate.

If a borrower's property value jumped from $150,000 to $200,000 during the period of the loan, the lender's 10 percent equity share of the sale proceeds could be $20,000. That's on top of the principal and interest balances that would have to be repaid.

Scholen advises careful examination of competing programs "to see what fits your objectives best."

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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