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Putting your mortgage into reverse.

Lately, reverse mortgages have been in the news, not all of it good. Many stories have featured seniors who are on the brink of being forced out of their homes because they didn't understand the provisions of their reverse mortgage. Others have been victims of predatory lenders who exploit vulnerable and unsophisticated borrowers by charging them more in interest and fees than is actually required to cover the risk of making the loan.

What is a reverse mortgage? It's simply a loan that lets a homeowner convert the equity in their home--built up over years of home mortgage payments--to a lump sum of cash, monthly payments, or line of credit.

Here's a simple way to think about it: with a regular mortgage, you make a payment every month and the mortgage balance goes down. With a reverse mortgage, you get a payment every month, and the mortgage balance goes up. And unlike a traditional home equity loan or second mortgage, you don't have to repay the loan until you no longer use the home as your principal residence.

There are some restrictions on reverse mortgages. You must be 62 years or older, you must live in the house as your primary residence, it must be a single-family home, and currently the value must be $625,000 or less.

Typically, people who get reverse mortgages are seniors who want to stay in their own homes but are having trouble making their mortgage payments or need to supplement their income. Others have used the funds to make their homes more elder-friendly with a walk-in tub, slip-resistant tiles, and other features that allow them to continue living there.

Before considering a reverse mortgage, you need to decide what your goals are, and most importantly, make sure that you and your spouse agree about those goals.

Here's an example of a couple for whom a reverse mortgage was a good decision--my own parents.

Because of the downturn in the economy, they were having to pull money out of their IRA portfolio to make their monthly mortgage payments. To change that, they took a reverse mortgage on their home, paid off their conventional mortgage, and now receive a monthly payment to help with their living expenses, medical needs, and so on.

Of course, a reverse mortgage isn't for everyone. Since the amount you can borrow is based on your age, the current interest rates, and the value of your home, a person who is 80 will be able to borrow more than a person with the exact same property who is only 65.

A reverse mortgage may not be a good idea if you're intent on passing your home on to family members. Since a reverse mortgage must be paid off when you move on or pass away, those family members would have to get their own mortgage. If they're unable to do that, the home would not stay in the family.

A reverse mortgage also may backfire if your spouse is under 62 and the house is in your name solely. If something happens to you, your spouse would have to pay off the mortgage or leave the house--not a good situation. For reasons like these, the Department of Housing and Urban Development requires applicants for reverse mortgages to receive counseling from a HUD-approved counselor.

What kinds of things should you watch out for if applying for a reverse mortgage? First, beware of a lender who says, "If you're 62 and older, this product is for you." That's merely an age qualification--it doesn't mean the loan is right for you.

Most people who sell reverse mortgages are paid on commission and don't necessarily have your best interests in mind. Don't be afraid to ask if the person you're dealing with is paid on commission or a salary (in which case they may recommend a different, better type of loan for you.)

Be sure to meet your lender face to face. While you can apply for a reverse mortgage online or over the phone, remember that you're putting your house on the line, so you need to be very careful and know who you are dealing with.

Be aware of your own limitations. Some surviving spouses have never been involved in their family financial decisions, for example, and could be easily taken advantage of.

With those caveats in mind, you may discover that a reverse mortgage is the best solution to your financial needs. A variety of reverse mortgage products are available and most of them are complicated. To find out if one of them is right for you, talk to your spouse, talk to your family, then talk to a banking specialist who can help you decide.

Ulrike Graham, a reverse mortgage specialist at Merrimack County Savings Bank in Concord and Nashua, can be reached at
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Title Annotation:Retirement Strategies
Author:Graham, Ulrike
Publication:New Hampshire Business Review
Geographic Code:1U1NH
Date:Jan 15, 2010
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