Be aware of the hidden regulations behind reverse mortgages

Reverse mortgages - a system where senior homeowners can exchange monthly mortgage payments for a lifetime flow of new tax-free income - are becoming more popular in today's market. On the surface, they seem almost irresistible, but there are downsides to the concept.

About 90 percent of reverse mortgages over the past year were insured by the Department of Housing and Urban Development (HUD). That includes more than 107,500 mortgages last year - up from just 157 in 1990. And the volume of applications continues to grow.

Brief description: A reverse mortgage is a loan against the equity in the borrower's home. Typically, it's paid out in monthly installments. These payments can continue for the homeowner's life as long as the owner continues to live in the residence. The loan is repaid, with interest, when the owner dies or moves permanently from the home.

In a few cases, the mortgage can be paid in a lump sum or taken as a line of credit. But most are given in monthly payments to the borrower.

The growing interest in reverse mortgages is understandable. Seniors face rising costs for their medication, groceries, gas and about every other living expense, while trying to live on a modest fixed income. A plan where they can increase their monthly income is very appealing and strategic to their growing financial needs.

The primary downside to taking out such a mortgage is the substantial fees attached to it. They can run 5 or 6 percent of the home's value - far more than a conventional mortgage. This is what the promotional ads and lender sales representatives don't usually address during initial information provided on the subject.

When the subject comes up, the sales representative will quickly note that some of the fees can be rolled into the loan, eliminating the need to pay them upfront. But that means even more interest will be accruing month by month.

Despite the high fees, the amount of monthly payments received by the borrower is generally decreasing due to lowering home values, and subsequently their equities. The calculated sum of payments depends on the amount of equity in the home and the ages of the homeowners. The older the senior, the more money will be paid. They must be at least 62 to qualify for the mortgage - most applicants are over 70.

The high fees and increasing interest in reverse mortgages are producing a rapidly growing number of salespeople entering the field and pushing the product. And with more intense competition, some of those reps are resorting to aggressive sales techniques.

I received a very official looking letter the other day appearing to be from the U.S. Postal Service. It turned out to be a pitch for reverse mortgages.

A reverse mortgage can be a positive move for some senior homeowners, but all factors should be carefully considered before signing such an application. For most seniors, the fees must come down to reasonable levels before the plan is feasible, in this writer's opinion.

Q: What's being done to help college students find needed housing?

A: In the interest of encouraging more housing opportunities for college-university students, a special financing plan has been launched by Freddie Mac, a major government-sponsored secondary buyer of home mortgages.

The plan would create exceptionally favorable financing for the acquisition or refinancing of multifamily properties where many students need housing. It's keyed to properties that are more than 50 percent occupied by students. The financing offers flexible terms including 30-year amortization. Some of the mortgages can be full or partial interest-only, and can be up to 80 percent loan-to-value.

"The new Freddie Mac Student Housing Mortgage is structured using terms obtained through feedback from our mortgage lenders and servicers, and student housing owners and operators," said Patti Saylor, a Freddie Mac vice president. "We continue to search for ways to expand our breadth of products in response to the demand in the marketplace."

The availability of the special financing plan is tied to the proximity of the property to a college or university. It must be available to at least 8,000 students (attending one or multiple schools). The housing units must offer nine- to 12-month leases.

Saylor noted that Freddie Mac has provided mortgage financing for about 55,000 multifamily properties totaling more than $194 billion.

Q: Are VA loans still a viable way to finance a home purchase?

A: Yes. Mortgage loans guaranteed by the Veterans Administration (VA loans) are becoming more popular in many markets.

For honorably discharged veterans, or those currently in active duty, fixed-rate mortgages are available at low interest rates and require little or no down payment. The loans are also available to persons with at least six years of service with the National Guard or reserves. Certain surviving spouses of veterans are also eligible. The loans are offered through local banks or mortgage brokers.

In most areas of the country the loan limit is $417,000, but it's higher in some high-cost areas. In most cases, these loans don't require private mortgage insurance coverage when the loan balance is more than 80 percent of the property's value. This costly coverage is required by most conventional mortgages. These loans are only available for owner-occupied homes.

The processing of VA loans usually takes longer than other types of mortgages, but the wait is usually worth it, considering the very favorable loan terms. Check with your bank or broker for more details.

To find out more about Jim Woodard, visit the Creators Syndicate Web site at www.creators.com.