Reverse mortgages can help seniors in a cash crunch

ST. LOUIS POST-DISPATCH

05/20/2007

Let me say right at the top that I like reverse mortgages. But I'm not a very sentimental guy, and I don't have a bunch of potential heirs who need my money and my assets.

But I'm jumping ahead of myself.

A reverse mortgage is a simple concept: Anyone age 62 or older can tap the equity in their house by having a mortgage company give them money.

The mortgage company gets its money back, with interest, when your house is sold.

It's a sad fact that many people have more money locked up in their homes than they do in liquid retirement accounts. Eventually, those people can become house rich and cash poor, unable to make ends meet when big health bills come due.

In the past, most people had little choice but to sell the house to get cash, forcing them to move. But with a reverse mortgage, the house can be a savior.

The rules for a reverse mortgage are pretty complicated, but in general here's how it works:

The amount you can tap into depends on the equity of the house (the value of the house, minus what you owe) and the age of the homeowners. In general, the older you are, and the more equity you have, the more money you can receive.

You can take out a lump sum, have a regular check paid monthly or take a combination of the two. You also can set up a line of credit, tapping into the funds as you need them.

The most common type of reverse mortgage — one backed by the federal government — caps the maximum amount homeowners can receive.

How much can you get? Let's say you and your spouse are 72 and you live in a house in St. Louis County with $200,000 equity. AARP's online calculator says you're eligible for a lump sum of $114,074, or a monthly payment of $746 for as long as you live in the home.

Because homeowners don't make payments, they don't need income to get a reverse mortgage. But reverse mortgages are expensive. Interest rates can be high, and mortgage insurance premiums are tacked on as well.

Still, you don't see any of those costs directly. The money flows until you leave the house or die. When you do leave the home, you or your heirs will get what's left after the mortgage company is paid off.

Many seniors balk at reverse mortgages because they don't want to dramatically reduce their home equity, and, thus, the amount passed on to heirs. But opinion polls show that heirs would rather see their parents stay happy and comfortable in their homes than be forced to leave for financial reasons.

So I encourage aging parents to think of themselves first. Your children will do just fine.

Indeed, a bigger problem is that a reverse mortgage is expensive and confusing.

From a pure cost basis, a simple home equity line of credit is cheaper. However, you have to make monthly payments with a home equity loan. And you usually need steady, stable income to qualify for a line of credit.

With a reverse mortgage, you make no payments.

I have only scratched the surface of reverse mortgages. I would urge anyone interested in them to start by contacting AARP, either through its superb website,

http://www.aarp.org/money/revmort, or by calling

1-888-687-2277.

Source: http://www.stltoday.com/stltoday/business/ columnists.nsf/jacknaudi/story/AA4070CF1CA0E7EC862572DF0077B8A2 ?OpenDocument