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Reverse mortgage: Know the traps

Illustration of a sinking house

Illustration by Wesley Bedrosian

At a time when many baby boomers are struggling to pay mortgages on homes that have lost value, the ads for reverse mortgages can sound like a lifeline. "There can still be so many happy times ahead of you," proclaims Henry Winkler, the actor known for his role as Fonzie on the "Happy Days" TV series. In an ad for One Reverse Mortgage, Winkler suggests that seniors turn their home equity into "tax-free cash that you can use for anything." But don’t reach for one too quickly. Reverse mortgages, which carry huge costs, can lead to foreclosure and should be seen only as a last resort.

Reverse mortgages allow people who are at least 62 years old to cash in some of their home equity for a lump sum or regular payouts while staying in the home. As long as borrowers maintain the home and pay the property tax and insurance premiums, the loan doesn’t have to be repaid until the last borrower dies, sells the place, or lives elsewhere for 12 months. One Reverse Mortgage is a major lender, as are Wells Fargo, Bank of America, and MetLife Bank.

Most reverse mortgages are insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program. Recent changes in that program and heightened competition among lenders are resulting in new loan options and lower up-front costs.

But other costs have increased dramatically, and ballooning finance charges can quickly drain your home equity. You also risk foreclosure if you can’t afford the property tax and insurance and can’t work out a repayment plan, under new federal guidelines announced in January. Those defaults and other costs are threatening the solvency of the government insurance fund that makes the loans virtually risk-free for lenders. (See For lenders, federal bailout paid by borrowers.) That’s why it’s important to fully understand the complex terms of reverse mortgages. Here’s what you need to know about three choices being promoted now:

What you can do

Before pursuing any type of reverse mortgage, consider whether you can better meet your needs by selling your home and downsizing. Also investigate less-costly options, such as low-cost home-improvement loans or state property-tax postponement programs. Consumers Union, the nonprofit publisher of Consumer Reports, offers a list of such alternatives on its Defend Your Dollars website ( www.DefendYourDollars.org). Click on "Reverse mortgage tips for consumers" in the Mortgages box.

If you opt for a federally insured reverse mortgage, you’re required by law to consult a counselor certified by the Department of Housing and Urban Development. You might also want to seek advice from a certified financial planner, a certified public accountant, or an elder-law attorney.

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