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By Ellen Hoffman If the market decline has sent you or your elderly parents scurrying to find more retirement income for now or the near future, consider taking out a reverse mortgage. This ingenious product allows you to convert your home equity into cold cash, so you can live virtually mortgage-free for as long as you remain in your house, condo, or co-op as your principal residence. In return for cash, when you leave the house or die, the property goes not to your heirs but to the lender.
To get a reverse mortgage, you must be at least 62 years old and either have paid off your mortgage or have substantial equity in your home. The size of the mortgage you can qualify for depends on a formula based on your home's value and the ages of you and your spouse, if you have one. You may collect the money you receive from the reverse mortgage in one of several ways: as a lump sum, in monthly payments, as a line of credit to tap at your will, or as a combination of monthly payments and a line of credit. The income is tax-free.
"LOAN OF LAST RESORT." What you do with the money is completely up to you. Harry Hone, 86, and his wife June, 83, took out the loan on their waterfront home in southeastern Virginia in the form of a $100,000 line of credit that they haven't tapped yet. "We figured we'd better have some standby income to call upon if we need it," he explains. Ron and Jean Masters, ages 74 and 72, have used their reverse mortgage to escape monthly mortgage payments and put an extra $10,000 in the bank to pay for visits from their home in Mesa, Ariz., to see their children in Northern California.
"For many years, the reverse mortgage was viewed as a loan of last resort for people who were financially hard-pressed," observes Peter Bell, president of the National Reverse Mortgage Lenders Assn. In today's economy, for example, retirees who are having trouble making ends meet as a result of the market decline could take out a reverse mortgage that would provide steady monthly income for the rest of their lives.
But people who still are working also should be aware that by incorporating a reverse mortgage into their financial plan -- meaning they'll need to pay off all or most of their mortgage before retiring -- they could get extra cash to enhance their lifestyle. It doesn't have to be used for necessities -- they could spend it to buy a second home or travel extensively, Bell points out.
DUAL PROTECTION. But under some circumstances, a reverse mortgage doesn't make sense -- mainly, if you expect to stay in your house for just a few years and/or not for the rest of your life, since the house must be sold to someone when you leave. For example, if there's a chance you might have to move to a nursing home or an assisted-living situation in the foreseeable future, it wouldn't be appropriate. Once you're out of the house for a year, the loan becomes due. The arrangement also isn't for you if you want to sell the home to your children or anyone else and continue living in it. And the house must be your principal residence.
There are three types of reverse mortgages. Experts say the most popular -- more than 8,000 of which were taken out in 1999 -- is the Home Equity Conversion Mortgage, which is insured by the federal Housing & Urban Development Dept. and has a loan ceiling of up to $239,250 this year, depending on where you live. The insurance on an HECM protects both the borrower -- in case the lender goes out of business -- and the lender, should the borrower default.
Since you're taking equity out of the home and its market value could change, you could end up wanting to move at a time when the lender wouldn't be able to collect all that's owed. The insurance covers that deficiency.
READ THE RULES. Other options include the HomeKeeper, offered by Fannie Mae (www.fanniemae.com/singlefamily/reverse/index.html), a government-chartered agency that allows you to borrow up to $275,000. Financial Freedom Senior Funding Corp. (www.ffsenior.com) in Irvine, Calif., provides a "jumbo" or "cash account plan," which can be used for homes with a higher value.
Not just the amount you can borrow but also interest rates, fees, and many other financial features vary depending on the type of reverse mortgage you choose. To illustrate the impact of lenders' different rules, Bell provided examples of possible costs and proceeds of reverse mortgages on a home valued at $250,000 for two couples: one aged 66 and 68 and another aged 76 and 78. The size of the loan available to the younger couple ranged from about $108,000 under an HECM to less than $30,000 for the Fannie Mae HomeKeeper. For the older couple, the range was $150,478 to $60,837 for the same two options.
Since the rules are so complex, it's essential to get expert advice -- including an analysis of the financial terms and impact -- before deciding whether this type of loan makes sense for you and, if so, which one to choose. HUD and Fannie Mae require people considering reverse mortgages to discuss them in an educational session with a counselor.
LOAN CREEP. Here are some of the points experts say you need to keep in mind: Counseling on reverse mortgages is available free -- you should never pay for it. Like any other mortgage, this one will have closing costs that could run to $3,000 or more, so you may need to compare various lenders' offerings. And as you take money out of the mortgage, say, in regular payments, the amount of the loan will increase.
If you change your mind or decide not to keep the house as your principal residence, the loan amount plus interest and fees become due. If you have other money, you can pay it off. Otherwise, you probably will have to sell the house (to your heirs or anyone else) and pay the debt. The loan is structured on assumptions about market value that pretty much assure you'll get enough money from the sale to pay the loan off.
You can find a list of "top-10 things to know about reverse mortgages" and locate HUD-approved counselors and lenders at www.hud.gov/buying.rmtopten.cfm. Other good sources: AARP's site, www.aarp.org/revmort, featuring a calculator that lets you compare the benefits of HUD and HomeKeeper loans, and the National Reverse Mortgage Lenders Assn., www.reversemortgage.org.
For most Americans, their home is their greatest asset. Now that we've had a striking lesson in how cavalier the stock market can be with retirement savings, exploring ways to leverage other assets for retirement is only common sense. Hoffman writes Your Retirement twice a month, only for BW Online