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Your Money > Ask the Expert
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Let's talk reverse mortgages
The pros and cons of reverse mortgages.
March 30, 2004: 11:59 AM EST
By Walter Updegrave, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - What are your feelings pro and con about reverse mortgages?

-- Josephine Amato, Wyckoff, New Jersey

Before I get into the advantages and drawbacks of reverse mortgages, let me give a quick review of just what these financial instruments are.

Essentially, a reverse mortgage is a mirror image of a regular home loan, which means instead of you forking over payments to a lender every month, the lender makes payments to you.

The amount of a reverse mortgage you qualify for depends on factors such as your age (you've got to be at least 62), the level of interest rates, the amount of equity you have in your home and borrowing limits that are set by lenders.

A steady income

Most reverse mortgages are set up to pay you a given amount each month or as a line of credit you can draw on whenever you need the cash, which makes reverse mortgages a good way for retirees to turn the equity in their home into a steady income they can live on during retirement.

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Rates provided by Bankrate.com.

The reverse mortgage payments you get aren't taxed, since they're loan proceeds, not income. Of course, you or your heirs do have to repay the loan, plus interest and fees, but that usually doesn't happen until you die, sell your home or stop living there permanently, perhaps to live in a nursing home.

In other words, a reverse mortgage can provide you with a steady income you don't have to worry about immediately repaying, plus it allows you to stay in your home the rest of your life if you like. So what pitfalls could there possibly be with such an arrangement?

What could possibly go wrong?

Well, the closing costs and other fees can easily run into many thousands of dollars. That may not be a problem if you stay in the house a long, long time. But if you die or sell your digs within a few years of taking out the reverse mortgage, those fees will have eaten up a decent slice of your home equity.

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You should also know that the interest rate and the fees you pay can vary enormously depending on which reverse mortgage lender you go to, as can the size of the payment you receive. Which makes it critically important that anyone considering a reverse mortgage take the time to compare the rates, terms and fees offered by several different lenders.

That said, I've got to warn you that it can be very difficult to compare the true costs of different loans from different lenders. The best way to do that is to compare each loan's "TALC," or total annual loan cost.

This figure, which reverse mortgage lenders are required to disclose by federal truth-in-lending laws, takes all loan costs into account as well as the timing on the payments you're projected to receive.

Do your research!

Because this is such an important financial decision and because sifting through the various offerings can be quite daunting, it pays to do some up front research before you even contact a lender.

You can start by going to the Reverse Mortgage section of the AARP Web site. There, you'll find tons of useful info, including a 52-page downloadable booklet that describes in detail how reverse mortgages work, a glossary of terms, a good explanation of the Home Equity Conversion Mortgage (the program insured by the Federal Housing Administration) and even a calculator that estimates what size payments you might expect.

If you still feel a bit daunted by the material, you may want to get proposals from several lenders and then run them by an adviser who has no stake in the outcome -- in other words, someone who does not make reverse mortgages for a living.

A reverse mortgage has the potential to make your retirement more pleasant and financially secure than it otherwise might be. And the more you understand these loans before you sign up for one, the more of that potential you're likely to reap.


Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Mondays.  Top of page




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