Retirement Realities
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Reverse mortgage gets affordable

Lower interest rate

A third recent change is that lenders can now use a minimum expected interest rate of 5 percent, instead of 5.5 percent, to calculate the maximum loan amount, Bell says. That lower rate means homeowners can borrow more money at a lower cost.

Borrowers may be tempted by the fixed-rate option, but Susanna Montezemolo, vice president of federal affairs at the Center for Responsible Lending in Washington, D.C., says the adjustable rate may be a smarter choice because the fixed rate requires that the borrower tap the full amount of equity upfront.

"For the majority of people, it makes more sense to take out a minimum amount upfront and then have access to that line of credit, because they will owe less in interest over time," she says.

Deferred payments

The revamped reverse mortgage is an improvement, but it's still a loan against the value of a house. The borrower gets a lump sum, line of credit, stream of monthly term payments or combination of those choices, but the mortgage loan still accrues interest, and one day, the principal and interest must be paid off.

"It's very important that people understand they aren't getting rid of their mortgage. They are deferring the payments, and the payments are accumulating over time, and they are paying interest on the deferred payments," Stucki says. "It's like putting a spigot on your equity and it's draining out, and you are paying for the privilege of liquidity."

The maximum loan amount today is $625,000, but that could change if Congress decides to lower national loan limits.

Counseling required

Counseling, either in person or on the telephone, is required for all reverse mortgage borrowers. Counseling sessions are private and personalized to the borrower's situation.

The borrower must now demonstrate an understanding of the information before the counselor will issue a completion certificate, says Bell.

Some nonprofit agencies offer reverse mortgage counseling free or at a nominal fee. The going rate is about $125.

"Even if they have to pay, it's probably a good investment," Stucki says. "They could be locking up their home equity and potentially draining out that equity at an alarming rate if they get the wrong product or make a wrong decision."

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