Thank you to everyone who submitted a question as part of our 3rd Anniversary celebration! Here is another of the many Q&As we’ll be posting in the coming weeks!

If you were going to do a reverse mortgage, what company would you use?
--Terry L., SC

Hi, Terry:

Reverse mortgages have become increasingly popular as many seniors find themselves financially strapped because of both historically low interest rates and portfolios ravaged by the stock market during the past two years. For other Dolans.com family members who may not be familiar with the term… 

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month, so your total debt increases over time as the bank sends you checks and interest accrues on the loan.

Because we don't know about your particular circumstances, we can't recommend a particular company, but we can pass along a few tips to help you make the right choice.

There are good reverse mortgages and bad ones, so be sure to do your homework!  Here are questions to consider:

• What type of interest? Reverse mortgages may have fixed or variable rates. Most variable rates that can adjust monthly, semi-annually or annually are tied to a financial index and will likely change according to market conditions.

We STRONGLY recommend a FIXED interest rate ONLY.

The interest rate charged does not affect the size of the loan, but it does affect the amount that you will ultimately "owe."

• What is the impact on your estate? Reverse mortgages can use up some or all of the equity in your home, leaving fewer assets for you and your heirs. A "non-recourse" clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid. We highly recommend this clause.
• What are the homeowner responsibilities? Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and all other expenses that go along with being the homeowner. So, for example, if you don't pay property taxes or maintain homeowner's insurance, the lender considers the loan asset at risk and could make the loan become due and payable.
• What are the tax implications. The interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Word of warning:  Be wary of lenders who, as part of the deal, want you to give them a percentage of the increase in your home's value over the life of the loan.

With home prices way down, there's a good chance your home will be worth more several years from now, which very much favors the lender. It would be less money for you or your heirs when the house is sold and the loan paid off. DON'T agree to it!

As a rule, if you have other ways to bring in extra income, we prefer other options like part-time employment or perhaps a small interest-free loan from a close family member to help you over a temporary rough patch. However, if you have substantial equity in your home, need the income from it badly and see no other way to get it, consider a reverse mortgage.

Before closing on any reverse mortgage, we highly recommend that you discuss it with close family members, make sure that all of you understand all of the details of the loan and, very importantly, have a lawyer review the paperwork.

Tip:  See if you qualify for an FHA-based reverse mortgage, which will cost you less. To do so, you must discuss the loan with a federally-approved counselor employed by a non-profit or public agency. The session should be free or nearly free. You can find a local housing counseling agency by calling 800-569-4287.

Go to http://assets.aarp.org/www.aarp.org_/articles/revmort/homeMadeMoney.pdf for AARP’s excellent online informational piece on reverse mortgages.

Shop around, Terry…tricky business!

Best,
Ken and Daria

Read More In: Estate Planning Your Home