For a generation of seniors whose biggest asset is their home equity, reverse mortgages should have been the perfect product. By borrowing against the value of their houses, owners can receive a monthly check from a mortgage lender to supplement their income. Later, after they've moved into nursing homes or died, their heirs can pay off the debt by selling the property. But up till now, reverse mortgages have been a bust. Their high fees plus the reluctance of many older people to take on additional debt, have tended to limit the market to the most destitute or those looking to stave off foreclosure.
Now, mortgage giant Fannie Mae wants to make the reverse mortgage a staple of senior life, which ensures that if you're over 62, you can count on seeing more solicitations in your mailbox. But its latest variation on the theme-dubbed Home Keeper for Home Purchase-still suffers from the high fee structure that limits the appeal of existing products. "For people who find themselves against the wall with no other source of funding, this is a plus," says Gary Schatsky, a New York lawyer and financial planner. "For everyone else, this should still probably be their last option."
Fannie Mae, the government-chartered company that buys and securitizes nearly 20% of all the nation's mortgages, clearly doesn't see Home Keeper as a last resort product. It is aimed at seniors who might like to move closer to their children -or to warmer climes-and buy a higher-priced house without taking on new mortgage payments. That group might include house-rich and cash-poor seniors-or people who don't want to cash out other investments to buy a house because they believe they can earn a higher return elsewhere. For now, Home Keeper loans are available only for detached houses, but Fannie Mae plans to extend the program to condominiums.
But Fannie Mae isn't stopping there. In the next few years, it expects to roll out other reverse mortgages that use a homeowner's equity to do everything from providing long-term disability insurance to paying for home health care. The reverse mortgage "will become a major financial tool that could be linked with any type of senior financial need," says Robert Sahadi, Fannie Mae's vice-president for housing initiatives.
With its latest option, which will be available through 400 mortgage lenders in 45 states, Fannie Mae hopes to tap into an increasingly mobile group of seniors. Unlike the traditional reverse mortgages, which can give older homeowners who have paid off their mortgages monthly income by borrowing against their equity, Fannie's newest offering is designed for individuals who want to buy a new house without making mortgage payments. You may also be able to pull out some equity from your first house to use for other purposes. The key is combining a large downpayment with the loan to make up the purchase price (table).
Up till now, any buyer wanting to take out a reverse mortgage on a new house had to incur two sets of transaction costs, one set to buy the property and another set to convert the standard note into a reverse mortgage. That meant thousands of dollars in additional closing costs and other fees. By enabling buyers to use a reverse mortgage for the initial purchase of a home, however, Fannie Mae says it will substantially reduce transaction costs.
"LAST OPTION." Despite those savings, financial experts say that the terms on the Home Keeper product aren't very attractive. Sahadi estimates participating banks are charging roughly one percentage point over conventional mortgages, or about 9%. In addition to a 2% origination fee, the borrowers must pay a 1% "insurance fee," which will protect the bank against the risk that you will live so long that your loan balance will exceed your equity. Both fees are assessed against the purchase price of the house, not the smaller loan amount.
Terms of these loans can vary dramatically among lenders, so experts suggest shopping around. Bronwyn Belling, a reverse-mortgage expert for the American Association of Retired Persons, notes that the amount a 75-year-old can borrow against a $150,000 house can vary by as much as $30,000, depending on which bank is considering making the loan. The loan amount is based on the equity in the first house,
as well as the applicant's age and other factors.
If you would like more information, call Fannie Mae at 800 732-6643. For $25, the nonprofit National Center for Home Equity Conversion (7373 147th Street, Apple Valley, Minn. 55124) sells a 340-page consumer guide that will explain in detail how reverse mortgages work. Once you understand all the nuances, you can decide for yourself whether the Home Keeper is a clever idea or simply a loan that's overpriced.