September 15, 1995

NEW REVERSE MORTGAGE LOAN AVAILABLE

By TOM KELLY

The Real Estate Advisor

I was once berated by a lender for writing about a loan program that was "limited to such a small percentage of consumers that it was not even worth mentioning."

However, it was an option - a viable option - and I think options are exactly what consumers need to consider. Not everything is going to work for the same people -- not unlike why Baskin Robbins offers 31 flavors -- but given the staid, inflexible history of mortgage banking, options continue to be refreshing.

And, it is impressive to see lenders actually offering options and alternatives when home-loan rates are relatively low. Historically, lenders have done no creative writing until interest rates move toward the sky.

A new wrinkle -- no, it's not for everybody -- that has just recently become available is a new reverse mortgage loan for seniors. Unlike the commonly used Federal Housing Administration reverse mortgages, the new alternative offered through Transamerica HomeFirst allows for greater borrowing power and a guaranteed monthly payment even if the home is sold.

"This is a very attractive option for persons who wish to move to a retirement community and out of the family home," said Jim Church, a reverse mortgage specialist at Directors Mortgage in Bellevue.

"Also, the Transamerica program allows duplexes, triplexes and fourplexes as long as the borrower lives in one of those units. In many cases, the typical FHA reverse does not work in those situations nor in the more expensive condominiums we have in this area."

A reverse mortgage insured by the Federal Housing Administration and does not have to be repaid as long as the home is occupied as the borrower's primary residence. Once you move, however, the loan is due and payable. The loan allows persons 62 years of age or older to tap into the equity of their homes by receiving monthly payments, a line or credit or a lump-sum payment. The loans began in 1989 and require a confidential meeting with an independent, FHA-approved counselor.

One of the most confusing fees involved in an FHA reverse mortgage is the mortgage insurance premium. Seniors are usually flabbergasted when they find the amount is 2 percent of the appraised value of the home. Couple that figure with a loan origination fee and standard closing costs, and a borrower can easily spend $6,000 to borrow $319 a month for life.

In addition, FHA sets a ceiling on the amount of home value it will lend against. That amount in King County is $148,400; $146,300 in Snohomish and Island counties; and $118,700 in Pierce County.

"One of the biggest pluses to the Transamerica reverse mortgage is that it will consider homes with values up to $1 million," said Jerry Capretta of Directors Mortgage office in Federal Way. "That opens up a large market of people who may have thought it was not worth it to work with the $148,400 figure."

For example, Capretta recently closed a reverse mortgage for a 93-year-old widow whose home had appreciated to $650,000 in value. She was given a $300,000 line-of-credit to be used as she wished.

"This woman needed an attendant and about $5,000 a month just to take care of her and her property," Capretta said. "Under the FHA program, she would not have been able to reach those numbers."

Reverse mortgages are expensive -- about 4 percent of the loan amount up front -- and the fees for the Transamerica product are similar to FHA loans. For folks with no other option -- especially those desperate to find a way to pay rising property taxes so they can keep their homes -- reverse mortgages are a needed niche loan and FHA has been instrumental in experimenting with needed niches.

However, if a home owner 62 years of age or older has another asset to use as collateral for a loan, the costs involved typically are significantly lower than those incurred with a reverse mortgage.

For example, a person can "margin" a stock with brokerage firm and pay no fee whatsoever. This means the owner can borrow against the value of the stock (usually 70 percent of the total value) and make not monthly payments. Interest accrues on the loan but he borrower is not obligated to repay the debt within a specific period. If the value of the stock drops, the borrower may have to pay the difference between the amount borrowed and the value of the stock. Conversely, if the stock's value rises, borrowing power also rises.

Interest on most "margin" accounts adjusts monthly as do many reverse mortgage loans. Other reverses adjust annually. The FHA reverses are indexed to the one-year Treasury Bill and a variety of payment options are usually available.

According to the American Association of Retired Persons, there are seven companies offering reverse mortgages in this state: Directors Mortgage (644-3278; 1-800-329-6400;); Seattle Mortgage (1-800-643-6610); Unity Reverse Mortgage (1-800-334-9057); Western States Mortgage (1-800-828-2814); Senior Income RM Corp. (1-800-774-6266); Investors Mortgage (1-208-345-8153); Home Mortgagee Corp. (1-800-669-8226). Most of these companies offer both FHA and Transamerica reverse mortgages.

And, just like most things, they're not for everybody.

Previous columns:

• DISCOUNT BROKERS AIM FOR MARKET NICHE, 08-18-1995