Consider a Reverse Mortgage, But Only as a Last Resort

Why? Despite studies conducted by AARP that indicate that a high percentage of reverse-mortgage holders are satisfied, the fact remains that this is an area ripe for fraud and predators.

It sounds attractive to be able to take a lot of money out of your house -- tax free -- and never to have to pay it back. But the upfront costs are high, and the interest on the loan accrues monthly.

Let's take this example: Your house is worth $500,000, and you have a $100,000 mortgage. You obtain a $300,000 reverse mortgage, which pays off your existing loan and provides you with about $200,000 for your enjoyment. In 10 years, assuming that your house appreciates at 4 percent a year, it will be worth about $740,000. But even if the interest rate is only 6 percent, at the end of 10 years, the loan amount will have increased to $537,000. This does not include lender fees and closing costs, which can be high.

If at the end of those 10 years, you want to downsize and buy a smaller home, or if you plan to leave your house to your children, the remaining equity -- about $200,000 in our example -- may not be sufficient for your needs.

AARP suggests that before any homeowner obtains a reverse mortgage, there are five important questions to ask:

· Do you really need a reverse mortgage?

· Can you afford that kind of loan?

· Can you afford to start using your home equity now?

· Do you have less costly options?

· Do you fully understand how these loans work?

What other options should you consider? You have no mortgage on your house. Why not look into a home-equity line of credit, which you should be able to obtain with little or no up-front closing costs? When you need some money, you just write a check out of that account. The value of such a loan is that you pay interest only on the money you actually have borrowed.

Interest rates are still relatively low. You could consider refinancing and pulling out some of that dead equity, though you would have to immediately start paying back that loan.

Additionally, instead of going to a commercial lender, you could ask your children if they can lend you money and set up a private reverse-mortgage situation. That way, the money that's eventually owed would be going to the people who are most likely to inherit the house anyway.

If you ultimately decide to obtain a reverse mortgage, there are some things that you should not do with the money:

· Do not buy stocks or bonds; there is no guarantee that they will appreciate significantly in value.

· Do not obtain an annuity, which will pay you a monthly sum. Your reverse mortgage can be that annuity at a much lower cost.

You should also give serious thought before using your money to buy long-term care insurance -- especially if it is being offered by the reverse mortgage lender.

A reverse mortgage can be your financial life ring, keeping you afloat in your senior years. But it can also be a weight around your neck, causing you to sink rapidly. Educate yourself before you make any firm commitments.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.