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Moving Forward in Reverse

They say you can't turn back the hands of time. But for seniors who qualify, you can turn back the terms of your mortgage so your lender pays you instead of the other way around - a la a reverse mortgage.

A reverse mortgage is a type of loan for older owners who want to withdraw money from the equity they've built in their home. A reverse mortgage can be a smart choice for seniors eager to reduce their bills and improve their quality of life - particularly older homeowners who don't work, don't want to sell their home, or aren't eligible for a home-equity loan or line of credit.

Reverse mortgages can be valuable tools for some seniors who are trying to supplement their retirement incomes, especially in an age when pensions and Social Security may not cover living expenses, says Anthony Hampton, a loan officer with Action Mortgage Brokerage in Medford.

"I just did one for my grandmother and she was tickled spitless," Hampton says. "Her mortgage payment went away and she gets a draw each month to supplement her social security."

Reserve mortgages aren't alluring only to house-rich, cash-poor homeowners, says Steven J.J. Weisman, author of "Boomer or Bust: Your Financial Guide to Retirement, Health Care, Medicare, and Long-term Care" (Prentice Hall, 2006). They're also attractive to wealthier seniors who wish to avoid capital gains taxes from the sale of stock.

To qualify, borrowers must be at least 62 years old, own their own home and have enough equity built up. Only owner-occupied homes are allowed, and the property must be the borrower's primary residence. There are no income requirements, but loan candidates must meet with a counselor from an independent, government-approved housing counseling agency who must review the loan's costs, financial fine print and alternatives with the potential borrower. The applicant may be eligible for a reverse mortgage even if they currently owe money on their home.

Seniors can receive their loan in a lump sum payment, as a monthly draw, or as a line of credit, Hampton says.

Reverse mortgages made for a fixed number of years "are useful for people who are particularly old, whose life expectancies are not long and whose income needs are great," Weisman says. "Closed-end reverse mortgages also make sense for 'younger-oldsters' who have chronic medical problems that require continuing care, but who may be able to receive this care in their own home."

Other plusses include the fact that reverse mortgage monies received (loan advances) are not taxable and that the borrower retains the home's title.

There are several disadvantages, however, including the fact that the interest owed compounds tremendously because the loan generally is not repaid until the homeowner either dies or moves out of the home. Plus, the points, closing costs and other fees charged for this type of loan are considerably more than the fees charged for a conventional loan, says Weisman.

Also, the loan comes due when the homeowner sells the house, moves out for 12 consecutive months or passes away. In other words, the home will not be left free and clear for heirs, who must repay the loan if they wish to keep the home, or as a condition of selling.

There are two types of reverse mortgages to choose from: a government-backed home-equity conversion mortgage, also known as a reverse annuity mortgage, which represents 90 percent of all reverse mortgages, and a conventional reverse mortgage backed by a private lender or by Fannie Mae. Currently, the lending limit for HECMs is $362,790. Fannie Mae's limit is $417,000. Private lenders often have no lending limit, but charge higher loan fees.

In general, the older you are, the more valuable your home, the less you owe on it and the lower the current rate of interest, the more money you're eligible to borrow.

"A lot of marketing is being done, and as the mystery around them unravels, they are becoming more popular," Hampton says.

According to the National Reverse Mortgage Lenders Association, the Federal Housing Authority insured 55,659 HECM loans through the end of September 2006, compared to 30,404 loans during the same period in 2005.

For more information on reverse mortgages call the U.S. Department of Housing and Urban Development at (888) 466-3487 or visit the AARP website at www.aarp.org/money/revmort