Rethinking Reverse Mortgages

You bought your house for $375,000 and your neighbor just sold his for $599,000. That's great -- but unless you want to downsize or move to a cheaper part of town, the best you can do is brag about it at parties.

The mortgage industry begs to differ. It purports that a reverse mortgage could be the key to your untapped pot of gold.

And if you listen to actor James Garner, he thinks so, too. As spokesman for Financial Freedom, a California-based company that is currently the nation's largest provider of reverse mortgages, Garner is out there telling folks that reverse mortgages can be your salvation (times must be tight for the actor).

Personally, I think he should go back to the big screen and you should stay away from these things.

A reverse mortgage is just that -- instead of making monthly payments on your home to the mortgage company, it'll send you a monthly check or lump sum that you can draw on, whichever you prefer. The proceeds from this reverse loan are tax-free and will not affect your ability to qualify for Social Security. Each payment will reduce your equity in the home but you still retain title so you must keep paying your homeowner's insurance and real estate taxes. The good news is you don't have to pay the loan back until the house is sold at the very end.

Ideally, you'll die before the payments, plus interest, exceed the value of the house. In that case, your heirs would sell the house, repay the loan and get to keep the leftovers.

If you happen to be a Sicilian who thinks he's going to live forever (a.k.a. my 96-year-old grandfather), your loan payments may exceed the value of the home. In that case, it's not your problem, because these loans are insured by the government.