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Looking for a way to tap into the equity of your home to finance your retirement?
Caution: Reverse mortgages are fairly new and before accepting this or any proposed financial product, it is wise to review the proposal with an independent financial planner.
Here is what a reverse mortgage is along with some pros and cons:
The Product: A mortgage letting older homeowners tap into their home's value without selling the house or having to make home-equity-loan payments.
The Selling Pitch: Unlock the cash to improve your standard of living, to pay for long term care insurance or to invest in annuities and life insurance.
The Pros: For seniors with pressing financial needs who are cash-poor but house-rich, a reverse mortgage "can be a beneficial way to get the basic income you need to stay in your home" or to pay for necessary expenses, says Sally Hurme, senior program manager with AARP Financial Security.
The Cons: Reverse mortgages are costlier than traditional ones. Moreover, because reverse mortgages are repaid only when a house is sold or the borrower dies, heirs may be forced to sell the house before they want to or find other assets to unload, possibly raising other tax issues.
In the most egregious cases, sellers persuade homeowners to take out reverse mortgages to fund other investments such as annuities, says Cheryl Kringle, an assistant attorney general in Washington state. The flaw with that strategy: The investment returns generally aren't large enough to cover the cost of the mortgage and interest payments. "This is wreaking havoc on people's lives," says Ms. Kringle.
The Fix: You have the right to cancel the mortgage within three days, says Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. But past that "there's not much you can do."
Source: The Wall Street Journal, January 13, 2007
