Two pieces of news for borrowers interested in reverse mortgages:
(1) Starting Oct. 1, you’ll finally get better comparative price information about the various mortgages available. All lenders will have to compute their financing costs in exactly the same way. So, you’ll find it easier to spot the better deals.
(2) Around the end of the year, the Federal National Mortgage Association, Fannie Mae, will be offering a new program through private lenders. The effect on the market should be electric. Ken Scholen, director of the National Center for Home Equity Conversion, expects the Fannie Mae loans to become a national program, bringing reverse mortgages to borrowers almost everywhere.
Reverse mortgages are for older people (typically in their 70s and up) with small incomes but valuable homes. You get a loan based on the value of your house. Depending on the lender, you can take the money in a lump sum; in regular monthly payments; or in the form of a credit line that you can tap whenever you want.
No repayments are normally required for as long as you live in the house. And there’s generally little or no cash outlay, because the mortgage’s upfront costs can be added to your total loan.
So, from your point of view, this loan feels like tax-free income. When you leave your home permanently-because you die or move away-the house is usually sold and the proceeds are used to repay the loan. There may or may not be any money left over for your heirs, depending on the terms of the mortgage, how much money you took and how long you lived there. Your heirs can keep the house if they borrow money elsewhere and repay the loan.
Reverse mortgages insured by the Federal Housing Administration (FHA) are available in 48 states plus Washington, D.C., (only South Dakoka and Texas are missing-the latter because the state constitution still imposes limits on mortgage loans). The total amount of FHA loans is based on home values of $77,000 to $152,000, depending on where you live.
Privately insured lenders, which can make larger loans, currently offer them only in 15 states. But that number should rise rapidly once the Fannie Mae program hits the market. Fannie Mae will finance loans based on home values up to $203,150. Some private lenders also offer lifetime annuities that pay you a monthly income even after you leave the house.
For information on where you can get a reverse mortgage, send $1 plus a stamped, self-addressed, business-size envelope to the National Center for Home Equity Conversion, 7373 147th St. W., Suite 115, Apple Valley, Minn. 55124.
Where you have a choice of loans, it hasn’t been easy to figure out which of them would suit you best. They carry different costs, charged at different times. For example, the FHA loans charge a mortgage-insurance fee upfront. That makes them appear more expensive than private credit lines with no upfront fee. But the credit lines typically carry a higher interest rate, which can make them more expensive in the end.
The new federal disclosure regulations require lenders to calculate your true interest rate, counting every fee you pay. This includes even the cost of the annuity, if that’s the type of mortgage you choose. It’s a far better form of disclosure than the annual percentage rate that borrowers get when they take out regular mortgages. The APR includes only some of the fees.
The new disclosures will show that reverse mortgages can be hugely expensive if you sell the house within a few years. That’s because you pay closing costs and other fees upfront yet receive the loan balance gradually. Take a 75-year-old who pays $6,600 in upfront costs and receives $571.53 a month.
After two years, she has borrowed $13,717 and her interest rate comes to 47.4 percent, Scholen says.
But the longer she stays in the house, the more money she receives from the lender and the lower her rate. At age 87, her life expectancy, she’ll have borrowed $82,300 for a rate of 9.4 percent. If you live long enough, you can wind up borrowing more than the house is actually worth. In that case, the lender or mortgage insurer swallows the loss.
P.S.: The FHA reverse mortgage program expires on Sept. 30. While lenders believe that Congress intends to renew it, the renewal may not occur in time. If you’re considering this loan, you should aim to close it before then.
