Reverse mortgages aren't for everyone

After her husband died, Ernestine Boach felt she needed financial guidance. It was 2003, and Boach had just turned 62. An adviser urged her to take out a reverse mortgage, available mainly to those 62 and older, and use the money to buy deferred annuities.

"He told me that he had a wonderful deal for me," she says.

It turned out to be a huge mistake. Boach wasn't well-suited for a reverse mortgage, which is a loan against home equity that doesn't have to be repaid until the owner dies or sells the home. The estate repays the loan, plus interest and fees. The home is typically sold to make the payment.

But Boach had planned to leave her home to her daughter.

"It's in a trust for her, and I was assured that the home was going to be saved," says Boach, who is now 66 and lives in San Diego.

Reverse mortgages represent a small fraction of the mortgage market. But they're growing fast because of a tantalizing advantage: They let seniors with small nest eggs tap equity in their homes for cash, without having to repay the loans as long as they stay in the homes. As the oldest baby boomers turn 62 this year, they're likely to face high-pressure pitches for reverse mortgages.

As Boach learned, it isn't always a wise idea, especially during the early retirement years. There are other ways to draw income out of a home, such as a home equity loan, that are cheaper and more flexible, experts say.

The amount you can borrow in a reverse mortgage hinges on your age, the home value and interest rates. The older you are, the more you can borrow. Yet the average age of borrowers is falling.

"It's a generational shift," says John Rother, policy director at AARP. "Our parents' generation saw the home as a bedrock of security, and it was a good deal to pay off the mortgage and own it free and clear. Many boomers, on the other hand, are treating the home as a financial asset and are using it to borrow against its value."

Meg Burns, director of the Federal Housing Administration's Single Family Program Development, notes that "as the boomers come of age, they'll be thinking about their home as an asset in their portfolio" that can help ensure a comfortable retirement.

The FHA's reverse-mortgage program, called the Home Equity Conversion Mortgage (HECM), is federally insured and is the most popular type. Those considering a loan that isn't federally insured should be sure they're working with a strong financial institution with a solid track record, says Peter Bell, president of National Reverse Mortgage Lenders Association.

Some reverse mortgages are now available for second homes. World Alliance Financial has introduced Simple60, for those as young as 60. The FHA's federally insured reverse mortgages aren't available for anyone under 62.

The reasons younger retirees might need a reverse mortgage vary. John Dull, now 66, retired in 1995 when his company was downsizing and he'd had some health problems. Since then, Dull and his wife have been relying on his pension and Social Security benefits. But their bills have been rising while their income hasn't.

"We had some debt to clear up and some improvements to make on the house," Dull says.

Still, reverse mortgages tend to be costlier than other home loans. The FHA's loan typically charges an original fee of 2% of the home value and a mortgage insurance premium of 2%. There are title searches, appraisals and other costs, too.

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