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How to Do a Reverse Mortgage Right

But any homeowner not desperate for lots of immediate cash should pass up the lump-sum option and instead use a mix-and-match option of taking the smallest monthly income needed while reserving the rest of the potential loan as a line of credit that can be tapped only if money runs short, Guttentag says.

That way, the unused credit line does not incur interest obligations, which can chew away at the homeowner's future borrowing limit. In fact, that limit will grow if the home continues to appreciate.

Best of all, the homeowner can modify the strategy as conditions change, taking a larger monthly payment or "tenure annuity" if necessary, or reducing or eliminating it if it's not needed. That would allow the credit line to grow even faster, leaving a bigger cushion for the future.

"A unique feature of the tenure annuity is that it can be modified at any time based on the home equity remaining at that point, for $20 paid to the servicer," Guttentag says. This can be done multiple times.

He offers an example of a 72-year-old owning a mortgage-free home worth $400,000. She could qualify for a maximum lump sum of $255,000 or take a maximum monthly income of $1,460. If she didn't need that much, she could take just $730 a month and have a $128,000 credit line.

This flexibility would be useful, for example, if the spouse with a traditional pension dies, leaving the survivor without that dependable income. Taking a minimal monthly income might also allow a homeowner to let other assets, such as stocks and mutual funds, continue to grow. And leaving a large credit line could provide a good safety net and peace of mind, even if it's never needed.

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