SOME FINANCIAL ADVICE ON THE QUESTION OF REVERSE MORTGAGES

Peter and Lana have seen the TV commercials about reverse mortgages. They were wondering if it would be a good way to go to help ease their current financial situation.

A reverse mortgage is simply an advance on the value of your home that accumulates interest. The accumulated debt does not need to be paid off until you die, sell the home or move out of the house. If you qualify, and are over the age of 62, you can get up to 30% of the value of your home and you can do whatever you want with the money. According to information, a reverse mortgage delivers the cash tax-free. Of course, if the money is used to invest and produce an income, some or all of that income will be taxable.

It is very important to understand the cost of a reverse mortgage before getting into one. Information obtained states that there could be an administrative fee of about $1,300 to set up your plan or more. On top of that, you will be able to choose a term of six months, one year or three years to determine the interest rate on your loan. Rates, of course will be subject to change at the end of the term. Interest is compounded semi-annually.

For example, if Peter and Lana get a reverse mortgage for 30% of the value of their $250,000 house and choose a three-year term (7.50% on Sept. 13, 2005), they would get $75,000 today to do as they please. Don't forget the $1,300 set up fee. Lana, at age 62, has a life expectancy of about 24 years. At that time, assuming no change in interest rates, the amount owing will have grown to over $439,026.

In spite of escalating home values over the last several years, they haven't appreciated in value much more than the rate of inflation over long periods of time. If we assume an inflation rate of 3% their home may be worth about $508,199 in 24 years. That leaves only $69,173 after paying off the loan. A contract clause found, states that "as property values decrease, the amount to be repaid is never more than the fair market value of the property at the time it is sold".

There are other ways to get money out of your home. You can sell it and buy something smaller. A home equity line of credit at much lower interest rates may also be a possibility. Talking with a Certified Financial Planner and exploring other ways to create income might be your best investment. It appears a reverse mortgage is great, if you have no one to leave your equity to.

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