Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 10, 1995 TAG: 9507100019
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK LENGTH: Medium
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.
Around the end of the year, the Federal National Mortgage Association (Fannie Mae) will offer 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. Such owners can get loans based on the value of their houses. Depending on the lender, they can take the money in a lump sum - in regular monthly payments - or in the form of a credit line that can be used on demand.
No repayments normally are required as long as the borrowers live in the house. And there's generally little or no cash outlay, because the mortgage's upfront costs can be added to the total loan.
So from the borrower's point of view, this loan feels like tax-free income. When the owner leaves the home permanently - because of death or simply moving away - the house usually is sold and the proceeds used to repay the loan. There may or may not be any money left over for heirs, depending on the terms of the mortgage, how much money was taken and how long owners lived in the house after taking the reverse mortgage. Heirs can keep the house if they repay the loan.
Reverse mortgages insured by the Federal Housing Administration are available in 48 states plus Washington, D.C. (only South Dakota 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 the locality.
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 a monthly income even after the owner leaves the house.
For information on where a reverse mortgage can be obtained, send $1 plus a stamped, self-addressed, business-size envelope to the National Center for Home Equity Conversion, 7373 147 St. W., Suite 115, Apple Valley, Minn., 55124.
Where you have a choice of loans, it hasn't been easy to figure out which would suit you best. They carry different costs that are 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 the 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, over time.
The FHA reverse mortgage program expires Sept. 30. While lenders believe 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.
by CNB