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Is a Reverse Mortgage for You?


Dear Liz:

I'm struggling with my costly home loan. To pay it off, I'm considering applying for a reverse mortgage. Is it true they've gotten cheaper?

spinner image Liz Pulliam Weston
Financial expert Liz Weston.
Photo by Art Streiber

A lower-cost version now exists, but you shouldn't rush into one.

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A reverse mortgage is a loan against your home equity that you don't have to pay back as long as you live there. Assuming you have enough equity in your home, you could use a reverse mortgage to pay off your existing mortgage.

The federally backed reverse mortgage known as a Home Equity Conversion Mortgage comes in a new, cheaper version. Whereas the traditional HECM Standard loan requires an up-front mortgage-insurance premium of 2 percent of your home's value, the new HECM Saver charges just one-hundredth of 1 percent (but the amount you can borrow is lower).

Here's the problem: These loans can still be expensive. In addition to the up-front premium, HECMs impose annual insurance costs equal to 1.25 percent of your loan's value. Other up-front fees may total thousands of dollars.

If you plan to move within a few years, a reverse mortgage may not be worth the costs. Before agreeing to a reverse mortgage, consider other alternatives such as downsizing, refinancing, or arranging a loan privately with a family member, using your home equity as collateral.

The Risks

Reverse Mortgage Checklist

1. Make sure a reverse mortgage is right for you: Talk to a CPA, financial planner, or elder-law attorney.

2. Shop around. Some lenders are reducing or even waiving origination and servicing fees.

3. Get an estimate of how much you can borrow at our reverse mortgage information center.

One of the upsides of a reverse mortgage: You don't make payments to a lender. But you can still default on the loan if you fall behind on your property taxes, homeowner's insurance, or homeowner-association fees, or if you fail to keep your home in good repair. As of March 2010, the federal government reports, more than 20,000 reverse-mortgage borrowers were in default on HECM loans. And if you default, you could lose your home.

Liz Weston, author of Your Credit Score: Your Money and What's at Stake, blogs at asklizweston.com.

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