The right way to use a reverse mortgage
For seniors, this option can be a reasonable way to raise much-needed funds.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) -- QUESTION: I'm a 73-year-old widow who receives about $1,150 a month from Social Security and a pension. I own a small home valued at about $100,000, but no other assets. I have about $25,000 in debt that requires payments of $600 a month.

By the time I make my loan payments and pay other expenses I'm barely scraping by. My kids have their own families and expenses, so they can't help out. I'm considering doing a reverse mortgage so I can pay off the debts and get a little breathing room. My kids are okay with this option?what do you think? - Mary M., Sweetater, Tennessee

It seems to me that a reverse mortgage is definitely worth looking into if only because it doesn't appear that you have many other options.

After all, if you're sitting on an asset worth $100,000 or so that can make your time on earth here a little more pleasant, why not tap into it?

The nice thing about a reverse mortgage for retirees like yourself is that it lets you draw on the money that's built up in your home while you're still living there - and you don't have to worry about repaying the loan as long as you stay in your home.

All in all not a bad deal.

The amount you can get through a reverse mortgage depends primarily on four factors: the value of your home, its location, your age and the level of interest rates.

You generally must be at least 62 years old to get a reverse mortgage, but the older you are when you take out the loan, the more money you'll get.

Based on your age, where you live and assuming you own your home free and clear, you would likely qualify for a loan of about $51,000.

You could take that in any number of ways: a lump sum, a credit line you could draw on when needed, a $320-a-month payment for life or a combination of these options. (See how large a loan one might qualify for at different ages, home values and locations.)

In your case, it seems you might want to consider taking a lump sum large enough to pay off your debts, and then take the rest as a credit line or monthly payment, or a combination of those two.

But as appealing as a reverse mortgage is, it's not something you should undertake lightly. The upfront fees can be substantial. If you stay in your house only a short while after taking out the loan - say, because you decide to sell or move into an assisted-care or nursing home facility - those fees could drive the effective annual interest rate on your loan into the stratosphere.

You must also consider that you could easily go through all or nearly all of your home's equity, leaving your kids with little or nothing after you're gone, although it sounds as if your kids are okay with this possibility.

See more on how reverse mortgages work from the April issue of MONEY Magazine.

You'll also want to talk to a counselor who can explain the ins and outs of these mortgages, tell you about the different reverse mortgage programs out there and help run some numbers to compare different loans and scenarios. The AARP's Reverse Mortgage Education Project can hook you up with a counselor who can do just that.

One final thing. Given your age and income, it's possible that you might qualify for financial assistance in any number of areas - housing, health care, utilities, etc. - from private agencies or the federal government.

So I recommend you check out the National Council on Aging's online BenefitsCheckUp service. It takes only five to 10 minutes to answer the questions online and, who knows, maybe you'll find you're eligible for a program that can save you a few bucks and make your retirement more enjoyable and secure.


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