Some tips about reverse mortgages

Staying Ahead

January 12, 1998|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

IF YOU might need a reverse mortgage, there's only one smart place to look: a lender with the seal of approval of the nonprofit National Center for Home Equity Conversion (NCHEC).

These lenders offer a unique NCHEC software program that compares the major loans available. Some are far better than others, providing more cash at a lower cost.

Reverse mortgages are for older people (in their 70s and up) with small incomes but a lot of equity in their homes.

You get a loan or credit line against that home equity, which gives you extra cash to spend. No repayment is normally required for as long as you live in the house.

When you leave the house permanently because you die or move away, it is usually sold and the proceeds used to repay the loan. Any funds remaining go to you or your heirs.

The reverse-mortgage market is dominated by two programs: the Home Equity Conversion Mortgage (HECM), insured by the U.S. Department of Housing and Urban Development (HUD), and the HomeKeeper Mortgage from Fannie Mae.

For the majority of homebuyers, HUD's HECM loan is by far the better buy, says NCHEC President Ken Scholen. But some lenders offer only the HomeKeeper loan. If they have both, HomeKeeper might be the one they push.

The reason isn't hard to find: Banks generally collect up to $4,543 for selling a HomeKeeper, vs. a maximum of $1,800 for selling HUD's HECM loan.

In certain circumstances, the HomeKeeper might be the better buy, Scholen says, for certain single people with homes worth more than the median in their county.

But every application has to be analyzed separately, with consideration of your age, marital status, where you live, the equity in your home and the loan's terms. Only NCHEC's software compares HECM and HomeKeeper by the same standard, to get a fair result.

The differences can be enormous. For example:

A 75-year-old with a $150,000 house might get $75,000 from the HECM loan but less than $45,000 from one of the smaller programs.

Say you want a credit line that lets you tap your home equity whenever you want. HECM's credit line currently grows by up to 8.5 percent a year, giving you access to an increasing pot of money. HomeKeeper's credit line doesn't grow.

To get the largest HomeKeeper loan, you pay an "equity sharing" fee of up to 10 percent of the home's value when it's sold. That's in addition to all standard fees. If your home sells for $200,000, you could pay the lender an extra $20,000.

Federal law requires that reverse-mortgage lenders disclose all loan costs for the following periods: two years after the loan closing, at the borrower's life expectancy, and 40 percent beyond life expectancy. You get what's known as a TALC rate (for Total Annual Loan Cost).

Guess what? The HomeKeeper's expensive equity-sharing fee is imposed one day after the loan's second year. On that day it could double your cost, but the jump doesn't show on the disclosure that HomeKeeper makes. By the next required disclosure period, this fee looks much smaller because it has been stretched over many years.

NCHEC's software, by contrast, shows the equity-sharing fee's full effect.

Pub Date: 1/12/98

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