WASHINGTON — Reverse mortgages--the most popular cash-raising tool for senior homeowners--have had a couple of inherent problems since they began to boom in the early 1990s:
They're difficult for the average borrower to figure out, and it's difficult to comparison-shop among the various reverse mortgages.
As a result, say mortgage industry experts, seniors and their families are often in the dark about which reverse loan makes the most sense for their situation.
And many reverse mortgage lenders do not explain the huge cost and benefit differences that can exist between competing loan programs.
But all that changed in April with the launch of the first Internet-based noncommercial reverse mortgage "calculator" site.
Created by the nonprofit National Center for Home Equity Conversion, the Web site (http://www.reverse.org) offers consumers an independent, easy-to-use resource that allows true comparison-shopping for competing reverse mortgage plans.
About 45,000 American homeowners have reverse mortgages, the majority of them taken out during the 1990s. Unlike traditional home loans, reverse mortgages provide cash advances or credit lines but don't require that the money be paid back until the borrower sells the house, dies or moves for other reasons.
How can homeowners--or their younger relatives--figure out which loan, if any, makes most sense?
The first step for smart consumers should be to visit the new reverse mortgage calculator site on the Web. The site is almost militantly noncommercial. It posts a prominent warning that "site visitors may use the calculator to estimate loan advances and costs but may not sell the information in whole or part to any party."
The Web site walks visitors through a series of sections on how reverse mortgages work, where to apply and what other financial alternatives exist for seniors who are house-rich but cash-poor.
The site also includes links to other online information sources, such as a service that provides you with an approximate market valuation of your home for $8.
But the interactive calculator is the big attraction. It helps you determine how much money you--or a senior close to you--could get with a reverse mortgage, and at what cost.
All you have to do is type in the applicant's birthdate--reverse mortgage amounts are tied to actuarial tables--along with the location and estimated value of the home. The calculator then lays out your main options.
Take the case of a 77-year-old Maryland homeowner. Her house near Washington, D.C., has appreciated steadily over the last 40 years and is worth about $300,000.
The Web site calculator revealed that if she took out a lump-sum reverse mortgage under the popular Fannie Mae "HomeKeeper" program, she could receive $126,104. The most she could obtain from a competing program from the Federal Housing Administration, by contrast, is $97,871.
If she shopped for a credit line from the two competing loan plans, however, the results would be strikingly different.
Since the FHA program allows maximum credit lines to grow over time--7.4% per year in her case--and the Fannie Mae program doesn't, in five years she would have a maximum-possible credit line of $139,644 using FHA, but $126,104 under Fannie Mae. In 10 years, the gap would be even wider--a maximum $199,246 from FHA and $126,104 from Fannie.
The cost comparisons from the online calculator were also eye-opening. The woman discovered that the federally mandated truth-in-lending disclosure used for reverse mortgages doesn't necessarily tell the full story.
Although the truth-in-lending rule supposedly rolls all interest charges and fees into a single annual rate, the Fannie Mae loan contains a fee that escapes notice under the truth-in-lending format.
To obtain the maximum Fannie Mae loan amount, homeowners must agree to an "equity-sharing" arrangement that gives the lender up to 10% of the home value at sale.
This extra charge takes effect on the first day of the third year of the loan--one day after the required two-year disclosure point. At the end of two years, for example, the Maryland homeowner's annualized cost would be 15.8% using FHA and 17.6% using Fannie Mae.
But on the first day of the third year, Fannie Mae's annual cost rate would nearly double to 33.2% because of the equity sharing charge, while the FHA cost would still be 15.8%.
The annual cost of both loans drops steadily as time goes on. By Year 10, the cost of the FHA plan would be 11% per year and Fannie's would be 17.8%.
The point here: Without a visit to an independent calculator site, the applicant and her family probably would never know about the Fannie Mae "bubble" cost. It's not a required federal disclosure, and lenders offering Fannie's reverse loans don't have to mention it.
Distributed by the Washington Post Writers Group.
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