Choosing wrong deal could cost extra

Hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that’s giving older homeowners more options to tap the equity in their homes — but also opening the door to more confusion and mistakes.

Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit.

Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. ”Jumbo” reverse mortgages — for houses valued at as much as $10 million — are becoming more common.

Instead of a borrower making payments to a lender, a user of a reverse mortgage finds the lender making a payment to the borrower. The borrower keeps control of the house, and doesn’t have to pay back the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or the homeowner’s estate.

The product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or a recreational vehicle to renting a Paris pied-a-terre.

With so many competing offers to choose from, homeowners could easily wind up paying more in fees and interest rates than they should. Fees are typically steep — more than 5 percent of the home’s value — and most borrowing limits are capped based on where the homeowner lives. Fees are paid up front or financed, while interest rates affect how much of your equity the lender ultimately takes.

Reverse mortgage lenders traditionally have charged variable interest rates; now, fixed rates are available, but they might cost you more, said Barbara Stucki, director of the National Council on Aging’s home-equity initiative.

Because of all the choices, homeowners need to be ”a lot more strategic” in how they shop for a reverse mortgage, Stucki said. Users must factor in how they want to take the payments and how much money they want to take up front.

Taking out a reverse mortgage to travel or spoil grandchildren is a far cry from just a few years ago, when such products generally were considered loans of last resort for seniors to avoid foreclosure or simply cover living costs.

The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1 percent of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41 percent in the year ended Sept. 30, according to the Department of Housing and Urban Development.

The new products — and new bells and whistles — mean that homeowners considering a reverse mortgage are facing more homework than ever before. There are two questions they should ask first:

• • What index does the loan use? It could affect your cost. Financial Freedom, the reverse mortgage unit of IndyMac Bancorp, launched a product last month that bases its interest rate on the one-month London interbank offered rate, or Libor, index. Reverse mortgages traditionally have used an index based on Treasury bonds.

Using the Libor index should lower interest rates ”over the long run” for reverse mortgage users, said Michelle Minier, Financial Freedom’s chief executive. But the borrower might have to give up ”a small measure of cash, from 2 percent to 5 percent,” to get the lower rate, she added.

Still, consumers should investigate products that use both indexes. Different products tack on varying amounts of extra interest to whichever index they use. One product might add 0.65 percentage point; another might add 2.00.

• • What are the fees? Fees typically run up to 7 percent on government-backed loans — in which the Federal Housing Administration insures lenders’ and borrowers’ risk — but are as low as 2 percent on proprietary loans. If you’re seeking a lump-sum payout for a reverse mortgage on a high-value home, some lenders are willing to eliminate or reduce the upfront costs. And if you borrow less, you can often lower your fees, too. But you might pay higher interest rates in exchange for lower fees, said David Certner, legislative-policy director at AARP, the Washington-based advocacy group.

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