Friday, May 29, 2015

Will a reverse mortgage be your friend or foe?

Your nest egg is small. Your retirement income is limited. And you're sitting on a highly appreciated asset—your home. A reverse mortgage, which lets you convert some of that equity into cash, might just solve the problem.

Depending on your health and financial stability, however, it could also create new ones.

"Reverse mortgages can be an effective tool for retirees, but the problem is that the interest rates tend to be higher than for other home loans," said Grafton "Cap" Willey, managing director at CBIZ MHM tax accounting and consulting firm. "I've also seen people outlive their ability to take any more equity out of their home and then they're forced to make tough decisions."

Indeed, cash-strapped seniors who spend all their available equity and later fall behind on property taxes and homeowner's insurance, he said, must sell their home and downsize, go back to work if they're able, or face foreclosure.

A reverse mortgage—the federally insured version is called a Home Equity Conversion Mortgage, or HECM—is a loan that enables homeowners age 62 and older to cash out a portion of the equity in their home.

The amount homeowners can borrow varies by lender but generally is based on age, home value and the interest rate at the time they close.

The National Reverse Mortgage Lenders Association offers an online calculator that gives borrowers a better idea of how much they might be eligible to take out.

As the name implies, the mortgage payment stream under such loans is reversed.

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