Mortgages that pay the Borrower

July 14, 1996|By Adele Evans | Adele Evans,SPECIAL TO THE SUN

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.

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