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New ways for retirees to convert home equity to extra income

Are older Americans ready to give up some of the equity in their homes so they can increase their cash flow? So far, the answer seems to be ``maybe,'' because at this point, there aren't enough programs in the United States that would tap very much of the estimated $500 billion to $600 billion in home equity held by the elderly.

That may soon change, however.

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``There are some important things happening now'' with home equity conversion, says Kenneth Scholen, executive director of the National Center for Home Equity Conversion in Madison, Wis. Even though the concept has received a lot more talk than practice, there have been some developments that could lead to wider use and acceptance of the idea.

The idea of tapping the unused equity in a retiree's home has been around for some time. After all, the reasoning goes, why should older people struggle to scrape by on social security payments and perhaps a pension when they are living in a house with no mortgage?

The first solution to this ``cash poor, house rich'' problem was the reverse-annuity mortgage, or RAM. Say a person has a house worth $90,000. A lender might write a loan for up to $72,000, usually at a fixed interest rate. But instead of giving the homeowners a one-time lump-sum payment, the lender makes monthly tax-free payments.

The problem with most RAMs is that if the homeowner outlives the $72,000 in monthly payments, he or she could be forced to sell the house to pay off the loan, then have to pay rent for an apartment or move in with relatives.

Older homeowners who are sure they aren't going to stay in the house for more than a few years may find this a perfectly fair arrangement, but others who do not want to give up their homes, or want something to leave for their heirs, have been watching the development of other programs and looking for signs of a legislative boost.

That boost may come soon from Congress, where an amendment to the 1987 housing bill includes funds for a pilot program to insure reverse mortgages through the Federal Housing Administration. The government would guarantee monthly payments to homeowners, to protect them if the lender goes bankrupt. It would also guarantee that the lender would get all his money back, even if the value of the house fell. Most important, it would let the homeowner stay in the home.

Unfortunately, prospects for this bill are not too bright right now.

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``It's probably not going to get enacted this year,'' Mr. Scholen says. In one form or another, the legislation has been kicking around Congress since 1983, he notes, and each year it's gotten a little better. But it's apparently not acceptable to enough people in Washington yet. ``It will probably be part of whatever housing or banking bill goes through Congress, whenever that is,'' he says.

In the meantime, then, it's left to private and state-run programs to keep the home equity conversion ball rolling.

One of the newest of these will begin later this year in Virginia.

``Its a deferred payment line of credit,'' says Carolyn Watts, director of planning and research at the Virginia Housing Development Authority. Instead of receiving a specified amount of money every month, whether they needed it or not, the homeowners would have a line of credit they could tap when they wanted or needed it.

``Most people who have lived for six, seven, or eight decades have learned to live within a budget,'' Scholen points out. ``Whatever money they have coming in, no matter how little it is, they will live with that.'' But if they need money for extra things, like a new roof, home nursing care, or even a cruise, they can tap this money. If they don't need it, they don't take it out.

But remember, this is a loan, which means payments of interest and principal - either by the homeowner or in the settlement of the homeowner's estate.

To keep the housing authority's risk exposure low, lines of credit won't exceed 20 to 30 percent of the appraised value of the house, Ms. Watts said. But that may be enough to meet special needs that could otherwise put a strain on a fixed-income budget. Eventually, if private lenders get interested, or if the authority can sell bonds to finance the program, the credit limits may increase.

A few other states have sponsored home equity conversion programs or have worked with private companies. One of these companies is American Homestead Mortgage Corporation in Mount Laurel, N.J. Its program is offered in Connecticut, New Jersey, Ohio, Pennsylvania and Maryland. It provides homeowners up to $1,000 a month for life. If there is any equity left when that person dies, the loan is repaid by the estate, along with most of the appreciation on the property. If there is no equity left, American Homestead takes the loss, something the company says has not yet happened.

The movement to convert home equity to extra income has grown slowly, Scholen says, mainly because of the understandable reluctance of older people who have finally freed themselves of mortgage payments to give up any of their equity. This is why these programs have to be structured carefully and why people considering them have to review them carefully with their attorney or financial adviser.

A list of the various programs around the country is available from the National Center for Home Equity Conversion, 110 E. Main, Madison, WI 53703. Include a stamped, self-addressed, business-size envelope.

You can get more information on how these programs work, including brochures for attorneys and lenders, from the American Association of Retired Persons Home Equity Information Center, 1909 K St., NW, Washington, DC 20049.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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