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Financial Education for Everyone

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February 22, 2008

More and more seniors unable to keep up with escalating living expenses have begun exploring reverse mortgages, where they draw equity from their paid-off homes and continue living there with no monthly payments.

Although reverse mortgages make sense for some people - especially those on fixed incomes who want to remain in their homes as long as possible - they have complex rules and hefty upfront costs, so look carefully before you leap.

Keep these considerations in mind:

You may qualify for a reverse mortgage at age 62 if you've paid off your home and it's your primary residence. The loan amount is determined by a formula based on your home's appraised value, your age, current interest rates, mortgage insurance and applicable fees. Generally, the older you are and the more valuable your home, the greater the available loan.

Unlike regular home equity loans/lines of credit, where you make monthly payments to repay the money you've borrowed, with reverse mortgages you don't need to repay until you move out permanently, sell the property or die. You or your heirs must then repay the borrowed amount or sell the house. Any leftover money goes to you or your estate.

Other key differences from regular home equity loans/lines of credit: Reverse mortgages have no minimum income requirements; the repayment amount never exceeds the home's sale value, so you're never liable for more than you originally borrowed as with a traditional mortgage when the home's value decreases.

You can take the money as a lump sum, a line of credit, fixed monthly payments or any combination. And because it's a loan, it's not considered taxable income so Social Security and Medicare benefits usually aren't impacted.

Observe these cautions, however:

  • Reverse mortgage fees are quite high (up to 5 percent of the loan's value), so also consider other alternatives such as a home equity loan or line of credit, downsizing homes or selling your home and renting.
  • Reverse mortgages are a better deal over a longer period of time, so if you plan to move in a few years they're probably not your best solution.
  • Because you continue to own the home, you're responsible for any homeowner's fees, property taxes, insurance and repairs. Failure to meet those obligations could ultimately result in loan cancellation or even foreclosure.
  • The longer you carry a reverse mortgage, the more it will decrease your home equity, so the inheritance you leave behind will be smaller. However, weigh that and living in your own home against the expense and possible inconvenience of moving into assisted living.

Be sure to consult a financial professional before applying for a reverse mortgage; if you don't know one, www.plannersearch.org is a good place to start your search. Note that federally insured reverse mortgages require you to meet with an approved independent counselor before applying for one.

AARP provides a comprehensive overview of reverse mortgages, including a free online seminar and a loan calculator (www.aarp.org/money/revmort). Also, visit the U.S. Department of Housing and Urban Development's site and enter "reverse mortgage" in the search box (www.hud.gov). Another good information source for issues retirees often face is Visa's free personal financial management site, Practical Money Skills for Life (www.practicalmoneyskills.com/elder).

Reverse mortgages aren't for everyone, but if staying in your home as long as possible is a goal, this kind of loan could be a good choice.


This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.