THE COLOR OF MONEY
Reverse mortgage fees can come as surprise

By Michelle Singletary

WASHINGTON — I received a note recently from someone who was outraged at the fees connected with reverse mortgages.

The man's elderly friend had gotten a reverse mortgage that included fees and closing costs totaling nearly $11,000. That was on top of a monthly loan-servicing fee of $35 on the $700-a-month payment.

"This loan stinks," the reader wrote. "Elderly people may only see that they are getting a monthly check, but not be aware of the hidden fees."

The fees that this man's friend was being charged weren't hidden or illegal. Nonetheless, he was right to be worried about the high cost of a reverse mortgage.

A reverse mortgage is available only to homeowners 62 or older. This type of loan allows seniors to convert equity in their homes into tax-free cash, without selling or giving up title.

Borrowers can take the loan as a line of credit, a lump-sum payment, fixed monthly payments, or a combination. The loan size depends on the borrower's age and other factors, and the loan doesn't have to be repaid until the borrower moves out of the home or dies.

The most widely available reverse mortgage is the Home Equity Conversion Mortgage (HECM), which was created by the U.S. Department of Housing and Urban Development and is insured through the Federal Housing Administration.

For more information about a HECM, go to AARP's Web page on this topic at www.aarp.org/revmort/ or call (888) 687-2277 to order a free copy of "Home Made Money: A Consumer's Guide to Reverse Mortgages."

Fannie Mae, the nation's largest purchaser of home mortgages, offers a reverse mortgage called "Home Keeper." For more information call (800) 732-6643.

Financial Freedom Senior Funding Corp. of Irvine, Calif., a subsidiary of Lehman Brothers Bank, offers a reverse mortgage called the "Cash Account Plan." Since this reverse mortgage has virtually no maximum home value or loan limit, it is best for seniors with high-priced homes. Call (888) 738-3773 for more information.

The HECM and Home Keeper products are available in every state, while Financial Freedom's product is offered in 32 states and the District of Columbia.

When it comes to an HECM, the interest rate isn't going to vary much, said Ken Scholen, director of the AARP Foundation's reverse mortgage education project.

"So you should focus on the fees," Scholen said.

Here's what you can expect:

• An appraisal fee. You will need to get an appraisal so the lender can determine how much your home is worth. Appraisal fees generally range from $300 to $400, according to the National Reverse Mortgage Lenders Association.
• An origination fee. This fee is for preparing and processing your loan. Under the HECM program this fee is limited to 2 percent of your home's value or 2 percent of the FHA loan limit for your area, whichever is less. Lenders have the right to charge a minimum $2,000.
• Mortgage insurance premium. Insurance for a reverse mortgage benefits both the lender and the borrower. It pledges that a borrower will receive all payments due as long as he or she lives in the home regardless of what happens to the home's value. It also insures that the lender will receive full repayment of a loan balance. The premium for a reverse mortgage cannot be more than 2 percent of your home's value (or 2 percent of the FHA maximum loan amount for your area, whichever is less). There is also an annual insurance premium of no more than 0.5 percent added to the interest rate charged on the loan.
• Closing costs. There is an array of closing costs not unlike those for regular mortgages.
• A servicing fee. This is the fee the lender charges for sending you a bill, account statements, making any changes in your loan advances, etc. The servicing fee can vary from lender to lender.

To get an estimate of fees, try the reverse-mortgage calculator at the National Reverse Mortgage Lenders Association's Web site (www.reversemortgage.org). And shop around for the best deal.