Are Reverse Mortgages a Good Idea for Retirees?

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Madeleine Brand speaks with personal finance contributor Michelle Singletary about whether so-called reverse mortgages are a good option for retirement-age homeowners. Unlike traditional mortgages, a reverse mortgage allows a homeowner to loan money against the value of the house, and the loan only comes due when the homeowner sells the property, dies or the house is no longer the principal residence. Singletary writes "The Color of Money" advice column for The Washington Post.

MADELEINE BRAND: More on money now, yours. Every Tuesday we're joined by personal finance contributor Michelle Singletary. Earlier I spoke with Michelle about reverse mortgages, that's one financial option for older home owners. Hi Michelle, tell us what a reverse mortgage is and who qualifies.

MICHELLE SINGLETARY (Reporter, The Washington Post): This is just a type of a loan that allows older folks, people 62 or older, to pull out the equity in their home without giving up the title to the home, and the best feature is that you don't have to repay the loan until you either move, pass away, or sell the home so it's a great way if you are house rich and cash poor.

BRAND: And are there any restrictions on how the money can be used?

Ms. SINGLETARY: There aren't you can use it to buy a Harley motorcycle or to supplement your Social Security. You can use the money however you'd like.

BRAND: And are tax laws favorable for reverse mortgages?

Ms. SINGLETARY: The good thing is that this isn't treated as income so it shouldn't affect your Social Security or Medicare benefits. And also it's not treated as taxable income so really it's like getting tax free income to supplement whatever you might have managed to save in your golden years.

BRAND: And now a lot of people take out home equity lines of credit for these kinds of things, so what are the differences?

Ms. SINGLETARY: Well with the home equity loan you have to make payments right away. You take out the loan and you've got to make monthly payments. With a reverse mortgage you're not making payments. In fact the bank is making payments to you. You can either get a reverse mortgage as a line of credit, or outright cash, or a monthly stipend, or combination of all of those.

BRAND: So Michele, what's the downside?

Ms. SINGLETARY: The fees can be high because it includes an application fee, an origination fee, closing costs, insurance, and a monthly servicing fee. But the good news is you can roll all of those into the loan if you just don't have that kind of money.

I would highly suggest that if you're interested in a reverse mortgage that you go to AARP's website. They've got tons of information on the basics of a reverse mortgage and also the federal government, you have to get counseling if you get an FHA backed reverse mortgage. Which is a great thing because people are being counseled about the pros and cons of a reverse mortgage.

But it's a good tool if you are cash poor as I said, but you've got lots of equity in your house. It's a good tool if you're worried about spending down what you've saved. And listen, if you're doing well and you just want to pull out the equity and use it to go travel around the world, just be very careful, understand that the fees are high and that it's just one option if you are older and you're looking for some cash.

BRAND: Michelle Singletary writes the Color of Money column for the Washington Post, she joins us every Tuesday for conversations about personal finance. Thanks Michelle.

Ms. SINGLETARY: You're so welcome.

BRAND: And if there's something you'd like to ask Michelle please go to our website N-P-R dot org. You can click on the contact us link, that's at the top of the page and send in your question. Be sure to include Michelle in your subject line.

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