Reverse mortgage: It's a loan, but it feels like tax-free income

Staying Ahead

March 25, 1996|By Jane Bryant Quinn

WASHINGTON - The reverse-mortgage market is expanding once again. Sometime this year, a second, nationally distributed loan program should make its way to a lender near you. For the first time, many borrowers will have at least two loans to choose between, one of which may offer far more cash than the other.

Reverse mortgages are for older people who need extra funds to live comfortably. The money comes out of home equity, with no current repayments required. It's definitely a loan but it feels very much like tax-free income.

The first national reverse mortgage was the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration and available in 48 states (all but South Dakota and Texas). It's a particularly good deal for people with homes of modest value.

The new loan, called Home Keeper, was created by the Federal National Mortgage Association, the nation's largest supplier of funds to the mortgage market. Only a handful of lenders are offering it so far. But Fannie Mae says that it ought to be widely available by the end of the year. Home Keeper may work particularly well for borrowers in higher-priced homes.

Since Fannie Mae first announced plans for the Home Keeper in November, it has fielded more than 80,000 consumer inquiries, says Robert Sahadi, vice president for housing initiatives. That's a record for Fannie Mae and shows the tremendous level of interest in these loans among retirees.

A reverse mortgage, like any other mortgage, is a loan against your home. But traditional mortgages provide you with cash up front which you repay in monthly amounts.

Reverse mortgages, by contrast, offer you three ways of getting cash: (1) In a lump sum perhaps for paying off your current mortgage; (2) in monthly payments for as long as you live in the house (with some loans, payments last for life); (3) in the form of a credit line, which you can draw on whenever you want. The most popular choice gives you monthly payments and a credit line, too.

You don't have to repay until you move out of the house, in which case you'll owe the loan balance plus all the accumulated interest. In some cases, the lender may also claim a portion of the home's appreciation or even of its total value.

To meet this obligation, the house will usually have to be sold. So those who take reverse mortgages will be leaving less money for their heirs.

Three private companies offer reverse mortgages today Household Senior Services (in 14 states, with more to come), Transamerica HomeFirst (in 13 states and the District of Columbia) and Freedom Home Equity Partners (California).

"We're at the start of a true, multiproduct market," says Ken Scholen, head of the National Center for Home Equity Conversion. Borrowers should look at all the choices available.

"Depending on their circumstances, one loan may pay tens of thousands of dollars more than another," Mr. Scholen says.

By federal decree, all reverse lenders now have to figure your "total annual loan cost" (TALC) in the same way. So you can spot loans that have substantially higher costs.

For $1 plus a self-addressed stamped envelope, the National Center for Home Equity Conversion will send you a list of all the lenders who operate in your state. For $29.45, it offers a book called "Your New Retirement Nest Egg," explaining reverse mortgages and comparing all the plans. Write to the center at Suite 115, 7373 147th St. W., Apple Valley, Minn. 55124. For book orders only, call 800-247-6553.

For a free list of HECM and Home Keeper lenders, call 800-7-FANNIE. You can also get a free Home Keeper brochure. If you ask, Mr. Sahadi says, Fannie Mae will send you a postcard when lenders in your area take on the new loan.

Home Keeper will offer both a straight loan and an "equity-share" loan. The latter provides a higher credit line and an increase in your monthly payments of 30 percent to 40 percent. In return, you (or your estate) will have to repay not only the loan amount plus interest but also up to 10 percent of the value your house.

If you're a younger retiree, reverse mortgages probably aren't for you. The monthly income would be too small. But once you pass 75 or so, the income starts getting interesting. By the time the baby boomers reach retirement, and need more money to live on, there should be a fully developed system for turning dwellings into cash.

Write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

Pub Date: 3/25/96

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