Growing competition in the reverse mortgage field means older homeowners now have more options than ever before in turning their home equity into retirement income.
For retired homeowners, reverse mortgages can help with a variety of needs - making home repairs, paying property taxes, increasing monthly income or maintaining a ready cash reserve for health or other emergencies.
But the array of new choices also means prospective borrowers must shop carefully for the loan that best suits their particular situation, warns Ken Scholen, a leading expert on reverse mortgages.
The wrong plan could cost you thousands of additional dollars in loan costs or significantly restrict the amount you can borrow.
"You need to do your homework before putting your home equity to work," said Scholen, director of the nonprofit National Center for Home Equity Conversion in Apple Valley, MN. "You simply cannot afford to make a mistake with your most important asset."
The entrance of Fannie Mae, the nation's largest provider of home mortgages, into the reverse-mortgage market is expected to bring other lenders into the field as well, greatly expanding the availability and variety of this type of loan.
Still a relatively new concept, reverse mortgages are tailored for homeowners 62 and older who are house-rich but cash-poor. This is a typical situation for older couples or individuals who have owned their houses for many years but whose incomes have dropped after retirement.
As the name implies, a reverse mortgage is the opposite of a conventional mortgage.
Instead of borrowing a large amount of money and then paying down the loan by making monthly installments over 15 or 30 years, a homeowner who takes out a reverse mortgage receives money from the lender in the form of monthly payments, a line of credit or a lump sum. Repayment is due when the homeowner moves, sells the home or dies.
Since home equity, not income, is used to qualify, reverse mortgages are particularly attractive to lower-income borrowers faced with few financial options.
Loan amounts are determined by the borrower's age, the value and location of the home and maximum credit restrictions imposed by the lender. Generally, the older the homeowner, the larger the available loan.
The homeowner retains title to the house and continues to live there while using it as collateral for the loan. The lender sends the funds to the homeowner for life or for a fixed number of years.
Because the money is borrowed, not income, it is not subject to income tax.
But large origination fees and other loan charges, high-interest rates, and in some cases a promise to share a portion of the growth of the home's future equity with the lender can make reverse mortgages very expensive, particularly in the early years of the loan. After the loan is repaid, there may be little or nothing left for the owner or heirs.
In addition to Fannie Mae's new "Home Keeper" mortgage program expected to be available nationwide later this year, consumers can choose from two other programs: the federally insured Home Equity Conversion Mortgages and private reverse mortgages available in certain states.
In general, Scholen said, the federally insured Home Equity Conversion Mortgage provides the most cash at the lowest cost if your home's value is near or less than the median value in your area.
For homes worth somewhat more than the median value, the new Fannie Mae plan might provide a greater cash advance because of its higher lending limits.
For homes that are considerably more valuable, a private plan that is not limited by government lending restrictions might provide the greatest cash advance.
But the only way to know which is the best reverse mortgage for you is to compare costs.
A new federal truth-in-lending law requires lenders to disclose total annual loan costs for all reverse mortgages, making it easier for consumers to compare and analyze loans.
When investigating a reverse mortgage, you want the answer to three basic questions: how much will you get, how much will it cost and how much will be left over after repaying the loan.
While you may prefer getting as much money as possible, these new lending disclosure rules will help you determine if borrowing a little more money will cost you a lot more in the long run.
Scholen outlines everything you need to know about the latest reverse mortgages, how they work and where to find them in his newly updated book, "Your New Retirement Nest Egg: A Consumer Guide to the New Reverse Mortgages" ($24.95, NCHEC Press). To order, call (800) 247-6553.
For those who just want to know where to find a reverse mortgage lender, the American Association of Retired Persons offers a free Home Equity Information Kit (Publication D15601). Send a postcard to AARP Fulfillment, 601 E St. N.W., Washington, D.C. 20049.