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Tap Into Equity With a Reverse Mortgage

Unlike a home equity loan, the bill doesn't come due until you die or decide to move out of your house.

Editor's note: As a special feature for April, offers a series of 20 stories on everything you need to know about real estate. Today's installment is Part 5.

Grace Grimm was widowed in her 30s and raised three daughters and a foster son. Last year, the 72-year-old Hummelstown, Pa., native decided she was ready to "enjoy life a little bit," but felt she couldn't give up her job at


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and keep making the payments on her $265,000 house.

But rather than sell the house, she opted to take out a reverse mortgage that allowed her to pay off the balance of her original loan and get a line of credit to pay for maintenance and upkeep. "This is my home, and I didn't want to give that up," she says.

A reverse mortgage is basically a backward version of the loan you probably used to buy your house in the first place. In a typical "forward" mortgage, the lender gives you money for the purchase of property. You pay back the loan in installments over time, gradually reducing your debt and increasing your equity in the property.

With a reverse mortgage, the bank gives you cash in exchange for a stake in the home you already own. You can take your money all at once, in installments, or in the form of a credit line. Every dollar you receive increases your debt, while your equity gets smaller.

You must be at least 62 and have a substantial amount of equity in your home to qualify.

Unlike a home equity loan, you don't have to start paying back a reverse mortgage right away. The bill doesn't come due until you die or decide to move out of your house.

When Grimm passes on, her heirs can pay off the reverse mortgage and keep the home, or they may choose to sell the property. If the sale price exceeds the amount owed, her heirs can pocket the extra money. On the other hand, reverse mortgage debt is "non-recourse," so even if the property declines in value, the lender can never go after assets other than the home.

These loans can be attractive options for people like Grimm who wouldn't otherwise have the funds to retire. They are also well-suited for retirees hit with unexpected expenses such as large medical bills.

Another emerging market: people who want to enhance their lifestyles during the golden years. Peter Bell, president of the National Reverse Mortgage Lenders Association, says he has started hearing about borrowers using reverse mortgages to purchase everything from campers and second homes to motorcycles. "The notion these loans are just for seniors eating cat food is not correct," he says.

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The fees can be hefty, so you should weigh the benefits and drawbacks carefully. Ken Scholen, the AARP's reverse mortgage expert, says these loans "are more expensive than most people realize or understand." He says a 74-year-old taking out a reverse mortgage on a $300,000 home could incur up to $15,000 in fees up front and be responsible for many thousands of dollars more in monthly charges. Many people decide to have these costs financed into the reverse mortgage.

The federal government requires consumers to meet with an independent counselor before they get a reverse mortgage, to discuss the financial consequences and identify possible alternatives. Typically, such loans have only been appropriate for those who intend to stay in their home for a long time, Scholen says.

Increased competition should help. With the baby-boomer generation approaching retirement age, more lenders are looking to enter the market or enhance their existing products. The number of federally insured reverse mortgages grew by 77% in 2006.

Some of the bigger lenders in this market, such as




Bank of America

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, now offer a wide selection of reverse mortgage products. That should translate into more flexible and attractive terms for borrowers.

Bell, the NRMLA president, expects to see new kinds of products tailored to specific needs, such as "jumbo" reverse mortgages for higher-valued homes and packages using reverse mortgages to finance other goods and services, such as long-term health care. Over time, he says, people will learn to "approach home equity in a different way."

AARP would welcome these developments, but Scholen cautions that the reverse mortgage industry is still in its infancy. He predicts it will be at least a few years before these loans become viable financial strategies worthy of inclusion in most people's retirement playbooks. "Unless you really need one," he says, "wait and see what develops."

Coming up next: Finding a professional home inspector.