Getting a reverse mortgage is a little like voting in an old Soviet election: Sure, you can show up at the polls, but there's only one candidate on the punch card.

While that's a bit of an exaggeration, it's not that far from the truth. Borrowers have a maximum of three loan programs to pick from and a minimum of none, depending on which state they inhabit. And because lenders basically just resell those programs rather than design their own competing products, most companies offer the same thing.

Still, borrowers shouldn't be lulled into complacency. They'll have to make plenty of choices no matter which loan program is chosen. And because each reverse mortgage plan has different strengths -- and because fees and fraud can catch unsuspecting customers -- experts say seniors should either shop smart with these tricky loans or not shop at all.

Three questions to ask
"When you look at a reverse mortgage, you ask three questions: 'What do I get today?' 'What does it cost me in rate and fees?' and 'What do I have left in the end?'" says Jim Mahoney, senior vice president of Financial Freedom Senior Funding Corp. Mahoney, who works for the only private company offering a proprietary reverse mortgage on a widespread basis today, adds that most consumers don't even get that far.

"The concept has been around 30 years, but in reality, the market is only about 10 years old. ... We're seeing significant growth in the market today, but part of the slowness historically has been the cost of educating the consumer."

With most "forward" mortgages, borrowers know what they're getting into. After signing a few documents, they get a set of house keys and start making payments for as long as 30 years. Most people have plenty of experience with them by the time they're 62. That's the age at which you first qualify for a reverse mortgage.

As the name implies, reverse mortgages operate in an entirely different manner. And because most people intend to die in the homes they borrow against, they usually have only one chance to get it right.

Understand your options
So where should seniors start? First, they have to understand their options.

Lenders generally offer one or both of two plans: the Home Equity Conversion Mortgage from the Department of Housing and Urban Development and the Home Keeper loan from Fannie Mae. In a few western states, consumers can also obtain the Financial Freedom loan from the company with the same name.

The mortgages operate on the same basic premise, but each has features targeted to specific consumers. HUD's HECM generally makes less money available than Fannie Mae's Home Keeper, for example, because HECMs are subject to stricter size limits. A HECM can't exceed the local Federal Housing Administration single-family home cap, which varies by county but is no higher than $208,800 in the continental United States, while a Home Keeper can be as large as the Fannie Mae jumbo loan limit, which is $240,000 in 1999.

At the same time, HECM interest rates are generally lower. Like all adjustable-rate mortgages, reverse mortgages have rates that equal some index number plus a margin. On HECMs, the margin is smaller than it is on Home Keeper loans. The amount the rate can adjust over the life of the loan is controlled more tightly, too.

As for the Financial Freedom loan, it can be for much more than its two competitors. But it can't be designed as a line of credit the way a HUD HECM and Fannie Mae Home Keeper can. At the same time, it can only be for up to 80 percent of the present value of a senior's home. That means some portion of the borrower's home equity will remain at the end of the loan term, no matter what happens.

Fees vary a bit
With all three loans, the fees a senior will pay vary somewhat, but not a lot. That's because both HUD and Fannie Mae have caps in place that keep the charges from getting too outrageous. Origination fees are usually restricted to either $1,800 or 2 percent of the home value, for instance.

On the other hand, both HUD and Fannie Mae require borrowers to pay points, or a percentage of their loan amounts, at closing. The 2 percent HUD charge and 1 percent Fannie Mae fee act like insurance premiums against the possibility that borrowers will end up owing more than their homes are worth by outliving their average life expectancies.

As with regular property loans, reverse mortgages also have charges for title searches, appraisals and other closing events. Seniors may be required to pay $15 or $30 a month in loan servicing charges, too, at the lender's discretion.

Armed with this information, seniors should be well-prepared to go out and shop -- if they can find a lender willing to help them out. In a recent spot-check of 20 large U.S. financial institutions, Bankrate.com found only four offered reverse mortgages. Two of those companies did so in just one state.

As a result, borrowers may want to start by searching the HUD Web site for approved lenders or by calling Fannie Mae at 1-800-7FANNIE. They can find more information about Financial Freedom, which lends in California, Arizona, Oregon, Washington and Colorado, by contacting loan officers that work in each of those states. Texans, on the other hand, will have to sit tight. State law doesn't permit reverse mortgages there yet, though lenders hope a statewide referendum in November will change that.

Watch out for con artists
No matter where they live, however, consumers should watch out for con artists. A few years back, some promoted themselves as "estate planning services" that could provide information about reverse mortgages and referrals to potential lenders. They charged a few hundred to a few thousand dollars for the service, despite the fact that seniors could get that kind of information on their own for free, according to Glenn Petherick, director of communications at the National Reverse Mortgage Lenders Association in Washington.

"Two years ago, three years ago, HUD cracked down on companies -- they weren't even lenders -- who were charging seniors to give them the telephone number and other information about where they could go to get information about lenders," he says. "The whole scandal sort of painted lenders and the reverse mortgage industry with a black eye."

Once they've found a company they're comfortable with, most borrowers will have to schedule a counseling session on reverse mortgages, as per HUD and Fannie Mae regulations. HUD customers must meet with someone in person, while Fannie Mae borrowers can go through the process on the telephone.

After that's finished, they will just about be ready to pick a loan program. But before they do, borrowers need to figure out how they want their money.

"The reverse mortgage should be thought of as a financial tool for financial planning," says Liz Scholz, director of the senior products group at Fannie Mae. "There may be circumstances where the senior has a need for steady income and uses the reverse mortgage for a steady stream of monthly payments. Or it may be the senior has a need for a line of credit type of flexibility to be able to tap into for emergencies or unexpected things such as home repairs or medical emergencies."

Process similar to 'forward' mortgages
After choosing a loan, the rest of the application and closing process is similar to the one for "forward" mortgages -- with one notable exception. To help them compare the cost of one loan to another, federal law requires that reverse mortgage lenders provide borrowers with what's called a Total Annual Loan Cost statement.

Costs can vary depending on how long the borrower lives and how much the home appreciates, so the statement calculates the total cost in several different ways, using different assumptions.

One section of the statement might show what the rate would be if the borrower lives for a very short time and the home hardly appreciates in value at all, while another would show what the rate would be if the borrower lives for a long time and the house shoots up in value.

Because seniors will be surrendering most, if not all, of the equity they've built up in their houses over the years, they should be sure a reverse mortgage is right for them before getting one.

"This is just a major departure from what's been out there to date. There are features of this loan that are just so completely different from everything else you've ever known," says Ken Scholen, program specialist with the American Association of Retired Persons. "You don't put debt against your house without a serious reason."

-- Posted: Aug. 12, 1999