Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

January 29, 2004

"Reverse mortgages: Pros and Cons"

Many seniors have been battered by low interest rates on their savings, soaring medical costs and little or no pension benefits, and their house is the last main asset that they haven’t borrowed against. Sales of reverse mortgages have soared from about 8,000 in 2001 to about 20,000 in 2003, according to the National Reverse Mortgage Lenders Association, which has further information at www.reversemortgage.org.

A reverse mortgage allows anyone over age 62 to tap into the equity in their home without having to sell it or leave it. The reverse mortgage lender appraises the home, and then offers to make a mortgage based on that value. Therefore, you receive a mortgage payment from the bank -- instead of the other way around. All the money you receive is tax-free.

You can get your money in three ways:

1. Credit line, in which you have a credit line against your house that you can tap whenever you want.
2. Lump sum, in which you get a lump sum which you can then invest.
3. Reverse annuity mortgage, in which the bank makes a fixed payment to you and your spouse for the rest of your lives. You can never outlive the payments.

There are some downsides to taking out a reverse mortgage. There are closing costs, like origination fees, that can be 2% of the loan amount, as well as mandatory mortgage insurance, which can add up to another 2%. There are also charges for title insurance, appraisals, surveys and other service fees from the bank. There is some competition coming into this field, however. Financial Freedom of Irvine, Calif., now offers the "Zero Point Cash Account," which limits all closing fees to $3,500 and requires that you draw down 75% of your credit line right away. With all reverse mortgages, you have to keep your property up and pay your insurance and property taxes because if you don’t, the bank can foreclose on you.

The rate that you are paying is based on a set formula set by Fannie Mae, which is a spread over 1-year T-bill rates. You can choose if you want the rate to float monthly or annually. Right now, the monthly rate is 2.85% and the annual rate is 3.45%.

To find out more about reverse mortgages, you can contact AARP at (800) 209-8085, where you can get a book called "Home Made Money." You can also find out more at www.reverse.org.

A reverse mortgage is not for everyone, but if you want to live in your home for the rest of your life and have few other assets, it can be a worthy way to boost your income.

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