May 26, 2008

Reverse Mortgages: a great idea but be wary

I've always thought that reverse mortgages are a great idea. It allows a retired couple to cash in the value of their home for living money yet still live in the property. If you are cash strapped then using a reverse mortgage to help your finances is definitely something to look into.

If you're not familiar with reverse mortgages (aka home equity conversion mortgage HECM), the basic idea is that you setup a contract with a bank where they pay you a monthly amount over time and then when you pass away the home is given over to the bank. Its basically a mortgage in reverse, hence the name.

I did a quick estimate using the Wells Fargo calculator and a $250,000 house would get a couple aged 65 a monthly payment of $831 for the lifetime of both spouses. That can be a decent boost in income if you don't have much for a pension or savings.

One obvious downside to reverse mortgages is that you will not have the home to leave to your heirs in your estate. But personally I don't think that's a concern. If you are not making much income and are retired then its much more important that you keep a decent standard of living than provide for an estate after you're gone.

But be careful. As Money magazine reports there are some traps to be wary of with reverse mortgages. They report that there are financial institutions trying to pitch other financial services along with reverse mortgages. The services pitched are annuities and long term care which may be too expensive or unnecessary. So be careful.

But is a reverse mortgage right for you? Maybe. The AARP site has a page with 5 questions to ask yourself if you're considering a reverse mortgage.

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