Reverse Mortgages: Best Deals

(MoneyWatch) 

How can I get the best deal on a reverse mortgage?

by Jane Bryant Quinn

1. Choose a Home Equity Conversion Mortgage (HECM). For most borrowers, it's the right loan.

2. Compare the HECM with one of the jumbo loans if you have an expensive house. Sometimes the jumbo wins. Often, however, 'll find that the HECM gives you all the cash you need, while saving you thousands of dollars in costs.

3. Look beyond the upfront cash the lender offers. A jumbo lender might provide a higher credit line at the start. But because 's credit line grows every year, HECM will probably provide you with much more money in the end. Your HEMC counselor can help you figure this out.

4. The most expensive way to borrow is by taking a lump sum up front. You pay interest and fees on the whole amount, even though you intend to use only part of the money each month. Fixed monthly payments aren't much better because your income won't rise with inflation. The best option is taking the loan in the form of a credit line. That way, you can draw money as needed and will be charged interest only on the amounts you actually use. What's more, a HECM credit line rises every year, so your borrowing power — and future income — will go up.

5. Reverse mortgages carry all the fees of regular mortgages and then some. You might pay $15,000 to $20,000 up front.

6. Most of these loans charge variable interest rates, adjusted annually. HECM gives you three choices:

• A loan with a rate that adjusts monthly. You get higher monthly payments and a lower initial interest rate than on the alternative choices. Over the life of the loan, however, the rate can rise by up to 10 percentage points.
• A loan whose rate adjusts annually. You get smaller payments and a higher initial interest rate. The rate can rise by up to 2 points per year and 5 points over the life of the loan.
• A loan with a rate that never changes, but there's a catch. You have to take the whole amount as a lump sum.

7. Finding the lowest-cost loan is tricky. Normal comparisons of rates and fees don't work. Reverse lenders are required to calculate a Total Annual Loan Cost, or TALC rate, based on all projected costs. The TALC rate is far from a perfect disclosure, but it lets you compare two loans in a reasonable way. Always ask for the TALC rate.

You can get a better, more customized cost estimate from a good reverse mortgage counselor. The counselor should be working with special computer software developed for this purpose by the AARP. The program lets you enter specific interest rates, possible rates of home appreciation, and the rate at which you'll draw money from your credit line. That shows you how the costs of the various loans change over time.

8. If your home rises substantially in value or interest rates drop, you might want to refinance your reverse mortgage. You'll pay the closing costs all over again, so ask the mortgage counselor to show you, in real numbers, all the pros and cons.

Excerpted from Making the Most of Your Money Now by Jane Bryant Quinn

Copyright 1991, 1997, 2009, by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc

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