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Pros and cons of reverse mortgages

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Although each state differs in the fine print, untapped equity in the home is not considered an asset in determining Medicaid eligibility, as long as it's owner-occupied. Recent federal legislation placed the home exemption ceiling at $500,000.

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For a homeowner with property worth more, there's definitely an argument for obtaining a reverse mortgage and then spending down the cash. But that cash is also subject to Medicaid's new time limitations on asset reduction. Talk to an eligibility specialist early in the process to see where you stand.

Additionally, according to Basich, the terms of many reverse mortgages knock homeowners out of their homes after a period of absence, which varies from lender to lender. He says some reverse mortgages require the full loan balance plus accrued interest be repaid when the house is vacated by the owner for a specified period of time -- like a prolonged, but temporary, nursing home visit.

"Can you imagine if you have nowhere to go to?" Basich says. "What incentive do you have to get better?"

Views of an advocate
Eric Tyson, author of "Mortgages for Dummies" and other books about personal finance, tends to see reverse mortgages as valuable retirement tools when homeowners understand them.

A former financial counselor, Tyson says counseling -- mandatory before entering into a reverse mortgage -- educates seniors to which lenders are reputable and which fall short.

"They should take their time, do their homework, do some reading about the topic," he says. "There's a lot of jargon and lingo they should get down."

He agrees fees associated with reverse mortgages run high. "That's usually the light-bulb moment for prospective borrowers," he says.

But, he adds, traditional 30-year mortgages also come with high price tags. Older people can find it more difficult to qualify for a mortgage since many retirees no longer work and have limited incomes. "People lose homes all the time when they default on their mortgage," Tyson says.

The majority of Americans rely on Social Security for their retirement. Problem is, there's often little to supplement Social Security -- except the home.

"What are you going to do with that equity? You can't take it with you," he says.

Investigate all the options
George Downey, past chairman of the Massachusetts Mortgage Bankers Association, says reverse mortgage are wonderful when used properly, but shouldn't be considered a financial panacea.

"The first take-away should be that every case is different and should be determined on a case-by-case basis," Downey says. Reverse mortgages make sense for some, but for others, there may be better solutions than tapping into home equity.

Downey says before committing to a reverse mortgage, take a look at other services available in the community. For instance, if a senior suddenly needs a lump sum amount to replace his home's heating system, home equity should not be the first resource to consider. Many power companies offer low-cost financing for heat, air conditioning and energy conservation improvements. And the local branch of the National Council on Aging is a great resource for other senior programs.

Next: "Reverse mortgages impact where the homeowners live ... "
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