There's no question that reverse mortgages are a vastly underutilized financial tool. After all, only about 7,000 of the loans that allow cash-starved seniors to tap into the equity they've built up in their homes over the years are issued annually.

But the catch-all housing bill signed into law in late December by President Clinton will give seniors a greater range of options and make the federal reverse mortgage program even more useful.

The sweeping legislation "recognizes the wealth Americans have in their homes is a valuable resource to help them receive the care they desire or enjoy financial independence throughout their retirement," said Peter Bell, president of the National Reverse Mortgage Lenders Association. Reverse mortgages give seniors the ability to stay in their homes without exhausting their personal savings by converting the equity into a tax-free cash flow, giving them maximum flexibility to address their particular financial needs.

The new legislation provides senior homeowners with a variety of incentives to utilize reverse mortgages:

• Long-Term Care Incentive -- The upfront mortgage insurance premium charged by the Federal Housing Administration's Home Equity Conversion Mortgage can now be waived for seniors who wish to use the money received from the loan to purchase a qualified long-term care insurance plan.

• Streamlined Refinancing - Senior owners who wish to refinance an existing HECM reverse mortgage will benefit from savings on the upfront mortgage insurance fee charged by HUD.

  The amount of the origination fee that was paid while obtaining their original loan will be applied toward the origination fee for the refinanced reverse mortgage. In addition, mandatory counseling will be waived if the owner has received counseling within the last five years.

  HUD also will establish guidelines to help owners determine the viability of a refinancing. Higher loan limits now in effect, coupled with lower interest rates, will allow many seniors who already have reverse mortgages to refinance and obtain even more money to live on, pay medical bills or made much needed repairs to their properties.

• Limit on Origination Fees - The origination fee will be capped at the greater of $2,000 or 2 percent of the maximum loan amount. Furthermore, the entire amount of the origination fee can be paid out of loan proceeds, allowing the borrower to incur no out-of-pocket expense.

• Broader Ownership Guidelines -- Seniors who reside in co-operatives as their primary residence will now be eligible to apply for reverse mortgages. Reverse mortgages are available to individuals 62 or older who own their home.

Borrowers can choose to receive the reverse mortgage funds as a lump sum, monthly income for either a set term or as long as they occupy their home, or in a line of credit -- or as a combination of all three. Borrowers can use the funds anyway they wish.

Borrowers make no monthly payments on a reverse mortgage during its term. The loan becomes repayable when the borrower permanently moves out or sells the home. In addition, the repayment amount can't exceed the value of the home. Any remaining equity in the home belongs to the owner or his or her heirs.

Reverse mortgages are originated largely by private lenders. The most popular is the government-insured HECM, more than 40,000 of which have been made since 1989. Other types of reverse mortgages are the Fannie Mae Home Keeper loan and two jumbo reverse mortgage products developed by Financial Freedom Senior Funding Corp. of Irvine, Calif. HECM and Home Keeper loans are available in every state.