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PERSONAL FINANCE

Nest egg nearly gone? Reverse mortgage can provide the funds you need

Homeowners who are 62 and older can tap the equity in their homes to provide dependable monthly income for life. A caveat: This type of loan has high upfront fees.

February 01, 2009|Kathy M. Kristof

If you're at retirement age and worried about how you'll pay the bills after the bear market devoured a chunk of your nest egg, you may be sitting on the solution: your home.

With a loan called a reverse mortgage, homeowners who are at least 62 years old can tap the equity in their homes to provide monthly income for life.

"Reverse mortgages can provide a lot of people with peace of mind because even when the market is down, you can secure lifetime income," said Tony Garcia, president of LibertyStreet Financial Group, a reverse mortgage lender based in Carlsbad, Calif.

The catch: Reverse mortgages have high upfront fees, so they make sense only for people who plan to stay in their homes for a long time.

Here's a rundown on what a reverse mortgage is and how you can know whether it makes sense for you:

What's a reverse mortgage?

With a normal mortgage, you borrow a set amount and then pay the lender back, with interest, over time.

With a reverse mortgage, you also borrow a portion of your home equity, either as a lump sum or in the form of monthly payments that are guaranteed to last for your lifetime. Some or all of the loan can be made through a line of credit that you draw down when you need the money.

The money borrowed under a reverse mortgage doesn't have to be paid back until either you move out of the home or you die. In the meantime, the interest that accrues is added to the loan amount. The loan, including interest and fees, is typically paid off from the proceeds of the sale of the property. Anything left over goes to you or your heirs.

What does it cost?

Plenty. Under reverse mortgages insured by the federal government, you pay an upfront insurance premium equal to 2% of your home's value (up to $417,000) and origination fees of as much as 2% of the property's value. In addition, you pay regular mortgage closing costs for such things as appraisals and title insurance, which can run $2,000 to $3,000 for an average loan. If your home is appraised at, say, $400,000, you would pay about $17,000 at closing. You also are responsible for $30 to $35 in monthly service fees.

On the bright side, you don't have to pay the fees in cash. They're generally added to the loan balance. But the fees do reduce the amount of cash you can get when you take out the reverse mortgage.

How much cash can I get on a reverse mortgage?

The amount you can borrow depends, obviously, on the value of your home but also on a variety of other factors, including the interest rate on the loan and your age.

Why does my age matter?

Because the lender assumes it won't get paid back until you die -- and because the loan balance grows until it is paid off -- the amount that can be tapped is based on your life expectancy. A current rule of thumb is to subtract 10 from your age and figure that's the percentage of your home's value that you could get based on these actuarial limits, if you home is worth $417,000 or less. The exact amount, however, depends on prevailing interest rates. The lower your interest rate, the more you can borrow.

What if my house is worth more than $417,000?

In that case, the amount you can borrow is calculated using $417,000 as the property value. For example, if you're 75 and your home is appraised at $1 million, the rule of thumb says you could get 65% of $417,000, or about $270,000.

That doesn't sound like much for an expensive house.

True. It's worth noting that the $417,000 is higher than previous home-value limits, and lawmakers are considering a proposal that would boost it to $625,500. If enacted, the measure would allow a 75-year-old owner of a $1-million home to tap $407,000 in equity (65% of $625,500).

If I get a reverse mortgage, does the lender get my home when I die?

No. The lender just wants to be paid. This can be done with the proceeds from selling the home. If your heirs want to keep the home, they would have to pay off the loan -- or buy the home from your estate, allowing the estate to repay the mortgage.

Can I get a reverse mortgage if I still have a regular mortgage?

Yes. But the existing loan must be repaid with some of the money you borrow under the new loan. So, if you had a $200,000 regular mortgage and, based on your age and home's value, you could borrow $300,000 with a reverse mortgage, you would have only $100,000 in money left after making good on the old mortgage. However, repaying the regular mortgage would improve your cash flow by eliminating your monthly payments on that loan.

Where can I get more information?

AARP's website offers a free publication on reverse mortgages and a reverse mortgage calculator. For details, go to www.aarp.org/revmort.

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kathykristof24@gmail.com

Kathy Kristof is a personal-finance author and syndicated columnist.

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