Like the Edsel and "New Coke" before it, reverse mortgages are the subject of enormous public attention and few sales, a situation which raises the magical question: Why are reverse loans a marketplace flop?

Having worked hard for decades to own homes free and clear, most owners have no desire to once-again have debt and monthly payments. From 1987 through March, 1998, as an example, HUD figures show that 9,688,042 loans were insured by FHA -- but of this number only 23,067 FHA reverse mortgages were originated.

As we get older many people would like to remain in their homes but also face declining incomes. With a reverse mortgage, an owner with substantial equity can receive a monthly check and stay in their community. While the theory is attractive, program costs have plainly dulled public enthusiasm. Here's why:

If you obtain a $100,000 mortgage regular financing it means a lender advances $100,000 at closing which you pay back over time and with interest.

With a reverse mortgage you receive a check (usually monthly, but other options are available) and interest is added to your debt. You receive checks until payments and interest costs equal the "loan amount," in this case a total of $100,000. In other words, you get less than $100,000 for groceries and auto repairs -- maybe a lot less. The good news, at least, is that the lender does not actually collect interest or principal until you move, enter a nursing home, die, or sell the property.

Reverse mortgages are touted as a device which allows the elderly to remain in their homes. But some things are not said:

• Reverse mortgage closing costs can be enormously steep. Origination fees equal to 2 percent of the appraised value -- not the loan amount -- are common.

• Reverse mortgage interest rates are higher than rates for other loans -- sometimes lots higher. Depending on up-front costs and the length of the loan, effective rates in excess of 50 percent are possible.

  For instance, if Smith pays $4,000 in fees up front for a reverse mortgage loan, gets $600 a month for 12 months, and pays 12 percent interest, at the end of one year his account will show payments to him of $7,200 and an interest cost of $561.60 -- a total debt of $7,761.60. If he then drops dead, to receive $7,200 he has paid out $4,561.60 ($4,000 in fees plus $561.60 in interest). In effect, the cost of such financing is 63.36 percent.

• Because of high rates and up-front fees, reverse mortgages are a costly choice for short-term borrowers, say those who have loans outstanding less than seven to 10 years.

• Most lenders do not offer reverse mortgages and one result is arguably less competition and choice than can be found with other loan formats.

The current rules require that lenders estimate reverse loan interest costs for a two-year period, the borrower's projected life expectancy (based on the owner's age at the time of application), and the borrower's remaining life expectancy plus 40 percent. In general, the longer the term being described the lower the rate.

The catch is that many reverse mortgage programs -- but not all -- have an equity participation clause. This clause says that in addition to high closing costs, in addition to high interest rates, the lender also gets a piece of the home's equity when it's sold.

And when does the equity participation ("bubble") clause kick in? Why two years and one day after a loan begins -- just in time to avoid inclusion in the two-year interest cost disclosure.

Reverse mortgages raise harsh issues. Yes, people would like to stay in their houses and communities -- but at what cost? Yes, an increased income for the elderly would be nice -- but at what cost? Yes, in many families it is important to provide children with an inheritance, but perhaps everyone would be better off if adult children provided a monthly stipend to aging parents rather than give much of their birthright to lenders.

There may be instances where reverse mortgages, in limited circumstances and without equity participation, are worthy of consideration. But homeowners should not contemplate such financing on the basis of lender representations alone. Instead -- before signing anything -- take these steps:

• Contact a fee-only financial planner, an attorney who specializes in elder law, or a CPA to evaluate reverse mortgage options. Ask the professional if they are affiliated with any reverse mortgage lender; if they will receive any fee, consideration, or business from anyone but you as a result of their recommendations, and if you are their "client."

• Make certain you have both a will and a living will. Speak with an attorney for details.

• Look into selling the property and moving to a smaller home in the same area.

• Look into refinancing.

• Avoid reverse mortgages to underwrite home repairs -- especially if the contractor offers cash on the side. ("Hey, we'll fix your roof plus give you $5,000....")

• Don't rush. Take your time and do your research.

• Never pay for reverse mortgage information from so-called "estate planning" companies -- such information is free from the lenders who make reverse loans.

Question Of The Week

Q We have an offer to purchase our home that depends on an inspection "satisfactory" to the buyer. If we accept this offer do we have a contract?

A You have something, but something less than a contract.

A real estate sales contract can generally be seen as agreement between buyers and sellers spelling out all particulars necessary to transfer property ownership. In the situation with the inspection clause -- and often with other clauses -- you have a "contingent" agreement because it is possible that the inspection will be unsatisfactory to the buyer and thus the deal won't go through.

A contingent offer can also be seen an option for the buyer. No one but the purchaser knows what is "satisfactory," so the buyer can effectively end the deal without penalty.

Because real estate agreements are complex, it is likely that relatively few offers now come without contingencies of one sort or another. For details, speak with your broker or attorney.

Weekly Resource

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Editor's Note: Content on this page reflects the opinions of Mr. Miller only and not necessarily the views of this or any other publication, organization or Website owner.