New twist on reverse mortgages

Reverse mortgages have become an increasingly popular way for seniors to keep pace with rising expenses. Typically, people borrow against their home equity and continue to live in the home with no monthly mortgage payment until they move out permanently, sell the property or die.

Recognizing that many seniors would prefer to downsize homes after retirement or relocate to another area, however, the government issued new guidelines that now allow reverse mortgages to be used to purchase a new home, provided proceeds from the sale of the old home (combined with other cash reserves, if necessary) cover the sales price, plus closing costs.

The advantage for these folks is that they don't have to tap as much of their savings or be tied to monthly repayments in order to purchase a new home as with a traditional mortgage or home equity loan/line of credit.

Reverse mortgages can be very complicated and expensive, so for many they aren't the best borrowing option. In fact, you are required to consult a U.S. Department of Housing and Urban Development (HUD)-approved counselor before being allowed to apply.

A few common features of reverse mortgages:

• You must be at least age 62.
• The home (current or future) must be your principal residence.
• You must own the home outright or be able to pay it off with proceeds from the loan.
• The allowable loan amount is based on your home's appraised value, your age, current interest rates, mortgage insurance and applicable fees. Generally, the older you are and the more valuable your home, the greater the available loan.
• You needn't repay the loan until you move out permanently, sell the property or die. Any money left after the sale goes to you or your estate.
• The repayment amount never exceeds the home's final sale value, so you (or your heirs) are never liable for more than you originally borrowed.
• Reverse mortgages have no minimum income or credit score requirements.
• You can take the money as a lump sum, a line of credit, fixed monthly payments or any combination.
• It's not considered taxable income so Social Security and Medicare benefits usually aren't impacted.

Observe these cautions, however:

• Reverse mortgages can be expensive: An origination fee up to $6,000, initial insurance premium of 2 percent of the home's value, a monthly insurance fee and other miscellaneous charges may apply.
• They aren't cost-effective if you plan to move in a few years.
• You are responsible for homeowner's fees, property taxes, insurance and repairs. If you don't pay them, you risk loan cancellation or foreclosure.
• The longer you carry a reverse mortgage, the more it will decrease your home equity, and thus, your estate. However, weigh that and living in your own home against the expense and possible inconvenience of an assisted living facility.

AARP's comprehensive overview of reverse mortgages includes a free online seminar and a loan calculator (www.aarp.org/money/revmort). HUD also provides valuable information, including a search engine to find HUD-approved housing counselors who can help you weigh the pros and cons for your particular situation (www.hud.gov).