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Bankrate's 2008 Retirement Guide
Finding the funds
Sometimes, finding that extra bit of income can turn a retirement nightmare towards a happy ending.
Finding the funds
New rules rev up reverse mortgages
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"It can be a good thing for an older retiree who is house-rich and cash-poor," says Eric Tyson, author of "Personal Finance for Dummies."

And that seems to be exactly who is using them, according to Bronwyn Belling, reverse mortgage specialist for the AARP Foundation. "Your typical borrower is a 73- or 74-year-old who has lived in the home a long time, seen a lot of appreciation but is having trouble making ends meet," Belling says.

However, reverse mortgages are not the automatic answer for everyone. "These loans work very well for some people and not so well for others," she says.

Because the fees are front-loaded -- paid first out of the proceeds of the loan -- reverse mortgages "are better for someone who wants to stay in their home a long time," Belling says. That's because, unlike a traditional mortgage, most of the fees associated with a reverse mortgage are paid upfront (subtracted from the overall balance that the homeowner is borrowing).

Currently, with a federally backed loan, that includes a 2 percent fee for insurance on the loan, plus an equal amount for the lender's origination fee, plus regular closing costs, which often run $2,000 to $3,000, Belling says.

For a 74-year-old borrower, that could total $14,000 to $15,000 on a $300,000 home loan, she says. Over the life of that loan, those costs can easily stretch to $30,000, she says. And that doesn't include interest.

It's not a good move for someone who wants to leave a home to his or her adult children. And, in some cases, the loans can affect eligibility for Medicaid and Supplemental Security Income, or SSI. So if you rely on those benefits, you'll want to talk with a knowledgeable, neutral third party (not your lender) to make sure that the loan or the way you've structured your payments won't interfere with your income.

Some borrowers also are getting new reverse mortgages to get out from under their existing mortgage for retirement, Belling says. "Depending on where you live and what the house is worth, you may be able to borrow enough to pay off the debt," she says. But if you're in financial trouble because your existing mortgage is a loan you really couldn't afford in the first place, you might be better off pursuing legal recourse against the original lender, Belling says. Always exhaust the legal remedies first, she says. "Some of those loans shouldn't have been made in the first place."

Many financial planners and consumer advocates view reverse mortgages as a tool of last resort.

"Reverse mortgages are a wonderful tool to have at your disposal, but you should only play that card if you're out of other options," say Phil Cook, a Certified Financial Planner in Torrance, Calif.

-- Updated: Dec. 30, 2008
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