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Know details before choosing reverse mortgage

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NEW YORK (10/30/12)--A reverse mortgage might sound like the perfect answer if you're looking for ways to cover retirement expenses.  If you're considering this option, proceed with caution (The New York Times Oct. 14).

A reverse mortgage allows homeowners age 62 and older to borrow money against the value of their homes and not repay it until the house is no longer their primary residence, they move out, or die. It lets a homeowner convert some home equity into cash without having to sell the house or pay additional monthly bills. Reverse mortgage proceeds are not taxable, and generally will not affect your Medicare or Social Security benefits. You retain the title to your home.

Unfortunately, new cases of reverse mortgage abuse by some small mortgage brokers, including some former subprime lenders, are growing.

If you're considering a reverse mortgage, think about these warnings from the Federal Trade Commission:

  • Beware of sales pitches. Once sellers know you're interested in a reverse mortgage, some will try to pressure you to buy additional financial products, such as long-term care insurance or annuities. If you're interested in these products, take the time to comparison shop. You'll have to maintain adequate homeowners insurance, but you don't have to buy additional products to qualify for a reverse mortgage. Other sellers may offer home improvement services, and then suggest that a reverse mortgage would be an easy way to pay for them. If cost or features of a reverse mortgage are confusing, or if you're feeling pressure to buy, walk away from the seller or lender and take your business elsewhere.
  • Know the features. Because you retain the title, you're responsible for property taxes, insurance, utilities and maintenance. If you don't take care of them, the mortgage can become due and payable. Reverse mortgages can use up all or some of the equity in your home and leave few assets for you or your heirs.
  • Know tax consequences. Reverse-mortgage interest is not deductible until you pay the loan off in part or in full.
  • Remember the right of rescission. You generally have three calendar days to change your mind and cancel the loan. This process should be explained at the loan closing. Get details from your lender.
  • Use a lender you can trust. If you aren't comfortable with a prospective lender, walk away. A good place to start is with your credit union. The professionals there will be straightforward about reverse-mortgage details. If your credit union doesn't offer them, the staff can refer you to another credit union or other reputable lender.
For related information, read "More Seniors Carry Mortgage Burden" in the Home & Family Finance Resource Center.