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Reverse Mortgaging Your Future
by Marc Eisenson

Over the years, Nancy and I have offered lots of ideas for growing your nest egg, because to truly enjoy retirement, you need enough money socked away to live comfortably and relatively stress free. And we've shown that you won't need nearly as much cash as most money mavens would have you believe. But if your nest egg, combined with Social Security and pension checks, isn't going to fund the kind of lifestyle you'd like, you'll still have alternatives.

One of the best ideas for retirees looking for extra income -- or anyone else, for that matter -- is to create an Ace in the Hole, a small, part-time business that can provide you with a stash of cash to help you fill in those gaps and save on taxes at the same time.

Another option that's a personal favorite of mine is to downsize your lifestyle. You don't have to live as simply as Nancy and I do to cut your costs considerably. But the sooner you do scale back, the more money you'll be able to sock away, and the less you'll need -- year after year after year.

You can also fill in the gap by tapping into what may well be your largest asset -- your house. If you've been pre-paying on your home loan as I've urged you to do again and again on these pages and in my book, The Banker's Secret, you'll have burnt your mortgage agreement long before you run for the 8:04 that last time.

Getting out from under those monthly payments is one of the best moves you can make in planning for your retirement. Think of all those years when you won't have to send mortgage checks to the bank. At $734 a month on a typical $100,000, 30-year home loan -- over $8,800 a year -- paying off your mortgage is a foolproof way to cut your costs considerably.

Your Own ATM

Once you actually own your home, you can turn it into an ATM (A Ton of Money)! You can sell, then buy or rent a less expensive house, and use the difference to help fund your retirement. Or, if you want to stay where you are, you can sign up for a reverse mortgage, a borrowing option that you'll be hearing more and more about over the next few years.

Consider yourself forewarned: A trade association of reverse mortgage lenders recently formed, announcing that "the potential market for reverse mortgages is enormous and largely untapped."

It won't be long now 'til some baseball has-been appears in a TV commercial, saying, "Imagine going to a closing and instead of handing over checks, you get them. And you don't have to sell your house to do it! Just come to the Cash Boutique ... ." Sounds good, doesn't it?

If you own your home free and clear (or close to it), and you're at least 62, a reverse mortgage will let you borrow against your home equity. Just like a regular, old-fashioned mortgage, the bank gets a lien on your home or condo in exchange for lending you money -- conceivably for as long as you live. (If you live in a co-op or in the state of Texas, sorry, but you're temporarily out of luck.)

You can get the money in a lump sum, in monthly payments, as a line of credit to draw on when needed, or as a combination of some or all of the above. Under some reverse mortgage options, the line of credit grows, under others it doesn't. But in general, how much you can borrow depends on how much the house is worth and how old you are. The younger you are, the less you'll be lent.

For example, HUD estimates that a 65-year old can borrow up to 26% of a home's value, a 75-year old, 39%, and an 85-year old, 56%. Say your house is worth $125,000. Using HUD's percentages, if you're 65, you'd get a loan for $32,500, $48,750 if you're 75, and $70,000 if you're 85.

No matter what your age, your house won't have to be sold, and the loan won't have to be repaid ... generally until you no longer occupy it, either because of a permanent move on this earthly plane ... or to another. When that happens, if the loan -- plus accrued interest -- is for more than the house sale fetches, the lender eats the loss. Anything left over, on the other hand, would go to your heirs.

You Better Take Notes

Reverse mortgages have so many permutations, conditions, and costs that lenders must send potential borrowers to a counseling session run by a government or non-profit organization. For a list of approved counseling agencies in your area, ask lenders, call your local office for the aging, or call HUD's Housing Counselor referral line at 800-569-4287.

If you're thinking of joining the 45,000 or so people who have already taken out reverse mortgages, you'd be very wise to have someone accompany you to the session. Or if you have a parent contemplating a reverse mortgage, I urge you to go along. In either case, I think it's a good idea to get counseling early in the process.

In trying to help a friend figure out how to advise his elderly house-rich-but-otherwise-broke aunt, I went for some counseling myself. The counselor explained reverse mortgages, and offered some ideas on other alternatives.

For example, many local governments offer low cost, deferred payment loans to help seniors finance home repairs and improvements. And there may be property tax abatements available. Or maybe your home could be purchased by your kids and/or other relatives, or someone else who will give you a guarantee that you can stay there for the remainder of your life (known as life tenancy). While the counseling session will help, reverse mortgage options are so complicated that you'll probably need far more information and perhaps expert help (say, from an accountant) to really think through your alternatives.

Before signing up for a reverse mortgage, research all your options from this perspective: how can you get the best loan -- for you -- at the cheapest price?

It also pays to talk to your heirs before you do anything. My friend and his cousins decided to each kick in a set amount (about $100 a month) to help his aunt out. They concluded that would be a helluva lot easier, and far cheaper, than going the reverse mortgage route.

Warning: Reverse mortgages carry very high upfront fees. So if the loan is held for only a few years, its cost can be extremely high.

But a reverse mortgage may be a blessing to those whose homes are perhaps their only significant asset, who need cash to make ends meet, and who don't feel they need to leave the home to their heirs.

For more information, read Reverse Mortgages for Beginners: A Consumer Guide to Every Homeowner's Nest Egg, by the expert on the subject, Ken Scholen. There are also two helpful Web sites: www.reverse.org and www.aarp.org/hecc/home.html.

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Reprinted from The Pocket Change Investor © 1999, Marc Eisenson & Nancy Castleman

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