Three for the Money : Loans: Comparison shopping is a must after selecting one of the three types of reverse mortgages. At stake is thousands in set-up fees.
You’ve given careful thought to the pros and cons of taking out a reverse mortgage and you’ve decided to go ahead. And you’ve looked over the three kinds of reverse loans that are available today and you have picked the one that’s best for you.
Now comes the hard part: comparison shopping among lenders to get the best loan.
“ ‘Remortgaging’ your house is a very big step, especially if you’re elderly and living on a fixed income,” said Tricia Smith of the Independent Living Resource Center, a San Francisco-based nonprofit group that researches issues concerning the elderly.
“But if you spend some time comparing the various reverse-mortgage loans that are out there, you could save yourself thousands of dollars down the road.”
Your job will be fairly simple if you’re looking for a “term” reverse mortgage--the type of loan that provides you with monthly stipends for a specified period of time.
That’s because you’ll know exactly how long the loan will last, how much money you’ll borrow and how much interest will accrue over the life of the loan.
Comparing the costs of other types of reverse mortgages--especially tenure loans, which will last until you sell your home or die--isn’t nearly as easy.
“The problem is that you’re missing several pieces to the puzzle,” said Bronwyn Belling, a housing specialist with the American Assn. of Retired Persons.
“First, you don’t know how long you’re going to live, so you don’t know how much you’ll get in future monthly stipends.
“And, since you don’t know how much you’ll get in stipends, you can’t tell how much interest you’ll accrue over the life of the loan.”
Tenure borrowers who are comparing loans in which the lender will also claim part of the home’s future appreciation must contend with yet another wild card.
“There’s just no way to tell how much your home will go up in value over the next several years, so there’s no way to tell how much appreciation the lender will get when the loan comes due,” Belling said.
When you’re trying to compare various reverse-mortgage loans, you should ask the lender to provide you with a computer analysis showing how much the loan would cost you based on all these variables.
For example, let’s say you want a $500 monthly stipend and you’re getting a tenure mortgage with an 11% fixed rate.
By punching the stipend amount and interest rate into a computer, the lender can show how much you’d have to pay back in principal and finance charges if you lived in the home for five more years, 10 more years or longer.
If the loan would carry an adjustable rate, you should ask the lender to estimate your finance charges over future years based on a range of possible interest-rate scenarios.
For instance, you could request that the lender tell you how much you’d owe if the average rate on your loan stayed at 11%, rose to 13% or dropped to 9%.
Even if you’re getting an ARM and you agree to give up some or all of your future appreciation, the lender should still be able to provide an estimate of what the loan would cost by inputting a variety of interest-rate projections, appreciation assumptions and the like.
It’s important to note that lenders who insist on sharing in at least some of your home’s future appreciation tend to charge lower set-up fees and, often, lower annual rates than those charged by institutions that don’t demand a share.
That’s because the annual interest they’ll charge is only part of their future profit: Their share of your appreciation will essentially provide them with “bonus interest.”
For example, San Francisco-based Providential Home Income Plan charges some of the lowest set-up fees in the nation: $750 plus 1% of the home’s value. So, upfront charges for a reverse mortgage on a $200,000 home would be $2,750 ($750 + 1% of $200,000).
Capital Holding Corp., another big reverse-mortgage lender, charges some of the stiffest upfront fees--a flat $3,000 to cover appraisal costs and other items, plus 7% of the home’s appraised value.
So upfront charges for a reverse loan on that same $200,000 home would be $17,000 ($3,000 + 7% of $200,000)--about $14,000 more than you’d pay to set up a loan with Providential.
The catch--and it’s a big one--is that Providential also usually gets two-thirds of the future appreciation of the property. Capital Holding doesn’t ask for any.
If your home doubles in value over the next 10 years and then you sell it, you’ll have to pay back all the stipends that Providential has given you, plus interest, plus 66%--$132,000--of your $200,000 in future appreciation.
On the other hand, if your loan was with Capital Holding, you’d simply have to repay the monthly stipends you had received plus interest. The extra $14,000 in fees you had incurred in setting up the loan would be a small price to pay to keep your full $200,000 in appreciation.
So which is your best move--choosing a lender who’ll charge low set-up fees but demand a share of your home’s future appreciation, or pay some stiff upfront charges to keep all the appreciation for yourself?
Once again, it all depends.
If you don’t plan on staying in your home for many more years, or if prices in your area aren’t rising much, you’ll probably be better off choosing a lender who will reduce its upfront charges in exchange for a piece of your future appreciation.
On the other hand, if you’re planning on staying in your home for several more years--or values in your neighborhood are soaring--you should probably pay the big set-up fees to keep all your home’s future appreciation.
“If property values keep rising fast, the extra money you pay upfront will be offset by all the resale profits that you get to keep,” explains Ray McEneaney, Capital Holding’s chief marketing officer.
Just as you did when you originally purchased your house, you’ll want to make sure that your reverse-mortgage lender tells you exactly what type of set-up fees you’ll be charged and how much each item will cost.
Also ask whether you must pay the set-up charges in cash when the loan is approved, or whether you have the option of simply “rolling” the fees over into your original loan amount.
“Most borrowers choose to tack their upfront charges onto their loan amount,” McEneaney said. “They don’t want to deplete what savings they might have just to set the loan up.”
It’s also important to make sure that your reverse-mortgage contract clearly states that the loan is “non-recourse”--that you can never wind up owing more than the house’s value, and that the lender can’t demand payment from your other assets.
If you don’t insist on a non-recourse loan and you eventually can’t sell your house for enough money to pay off the reverse mortgage, the lender may be able to force you to sell your other items--cars, other real estate and the like--to make up the difference.
You might also want to talk over your plans with a financial planner and have a lawyer look over your loan documents, experts say.
A planner might be able to find a better, less expensive way to solve your financial problems. The lawyer can help ensure that your reverse-loan contract protects you and not just the lender.
In fact, many reverse-mortgage lenders actually insist that would-be borrowers get financial counseling from a neutral third party before they’re awarded a loan. Other lenders have staff specialists who provide advice.
Belling of the AARP offers one more suggestion before you agree to take out a reverse mortgage.
“Make sure that you talk your plans over with your kids,” she said. “Sometimes even grown children don’t know that their parents are having financial problems, and they’re happy to help out if they can.
“And maybe just as important, this kind of talk usually leads to other types of conversations, about death and wills and other things. Those kinds of topics can be uncomfortable to broach, but you and your family need to talk about them nonetheless.”
Reading Up on Reverse Mortgages
Here are some of the primary sources for more information about reverse-mortgage loans:
* American Assn. of Retired Persons. The nonprofit group provides several useful pamphlets and books, including its comprehensive “Home-Made Money: A Consumer’s Guide to Home Equity Conversion” and a list of reverse-mortgage lenders across the nation.
For a free copy of either publication, send the request on a post card to AARP Home-Equity Information Center, P.O. Box 2400, Long Beach, Calif. 90801-2400. Delivery takes about three weeks.
* Independent Living Resource Center. This nonprofit group also publishes a list of reverse-mortgage lenders and a brief description of alternatives. But unlike the AARP, the center focuses only on California--which means its list tends to be more up-to-date than those offered by other agencies.
The free list can be obtained by writing to the group at 70 10th St., San Francisco, Calif. 94103. Requests must be accompanied by $1 and a self-addressed, stamped envelope.
* Life Services Inc. The company, which essentially makes reverse mortgages on behalf of a consortium of lenders, offers several free brochures.
The agency also provides counseling and assistance to elderly Southland residents. Initial consultations to discuss its reverse-mortgage loans are free, but there’s a fee charged to people who go on to use the program.
Life Services is headquartered at 1025 N. Brand Blvd., Suite 320, Glendale, Calif. 91202. Its phone number is (818) 547-0585.
* National Center for Home Equity Conversion. Its free list contains names and addresses of reverse-mortgage lenders across the country and can be obtained by sending a self-addressed, stamped envelope to the group’s headquarters, 348 W. Main St., Marshall, Minn. 56358.
The center also publishes a highly regarded guide to sale/leasebacks, which are often a less expensive proposition than taking out a reverse mortgage. The guide, which includes a model contract that can be used to fashion a sale/leaseback of your own, costs $45.
STATE’S REVERSE-MORTGAGE LENDERS Here is a list of some of the largest reverse-mortgage lenders in California. Some offer the products statewide, while others work only in specified areas. A few tend to move in and out of the business frequently, based on their cash reserves and other factors.
* American Homestead Mortgage Corp., 305 Fellowship Road, Mt. Laurel, N.J. 08054. It quit taking loan applications in California in January, but plans to resume operations later this year.
* Bank of Lodi, Callbox 3009, Lodi, Calif. 95241; (209) 367-2000. Lends only to borrowers within 50 miles of Lodi.
California Financial Express, 971 E. Green St., Pasadena, Calif. 91101; (818) 577-0233. Active in Southland only.
* Capital Holding Corp., Home Income Security Plan, P.O. Box 32830, Louisville, Ky. 40232; (800) 431-8100 or outside California, (800) 962-6550. Active throughout California and in most other states.
* First California Mortgage, Home-Equity Conversion Department, P.O. Box 750939, Petaluma, Calif. 94975; (707) 792-5400. Makes loans across the state.
* Life Services Inc., 1025 N. Brand Blvd., Suite 320, Glendale, Calif. 91202; (818) 547-0585. Loans in Southland only.
* Provident Central Credit Union, 1825 Magnolia Ave., Burlingame, Calif. 94010; (800) 632-4600. Offers loans to all its 100,000 members across the state.
* Providential Home Income Plan, 3 Embarcadero Center, Suite 2350, San Francisco, Calif. 94111; (800) 441-4428. Active throughout the state.
