How to Get Cold Cash in Tough Times

You've cut back on expenses and tapped your reserves, but you're still falling short. How to borrow money (very carefully) when you can't turn anywhere else.

By Cathie Gandel | December 2008


HOW IT WORKS – If you’re at least 62 and own your own home, you can tap your equity by taking out a reverse mortgage. You’ll need an appraisal, an inspection, a mortgage broker, and a lender—just as you do for a traditional mortgage. Payments on the loan, however, are reversed: The bank pays you.

The amount you get depends on your home’s value and location, current interest rates, and, if there are co-borrowers, the age of the youngest one. As you dip into your reverse mortgage, your debt increases and interest is added to your loan balance.

The loan comes due when you die, sell, or move away permanently—perhaps to live with your children or at an assisted-living facility. Your heirs will still inherit the house, but they will also inherit the debt—which they will have to pay off within six months, often by selling the house.

Most reverse mortgages today are home equity conversion mortgages (HECMs), insured by the Federal Housing Administration (FHA). HECM loan amounts are based on a new national equity limit that had not been released at press time (visit for an update). Your loan will be based on either your home’s appraised value or the new equity limit, whichever is less. And you won’t get all of that: Expect between 55 and 85 percent. You can take the money as a lump sum or a monthly cash advance or leave it in a line of credit to draw on as needed.

The FHA requires that you see a reverse mortgage counselor before applying for an HECM mortgage, to make sure you understand the process and the potential pitfalls. “If it’s important for you to stay in your house, a reverse mortgage might be a good tool,” says Rick Jurgens, a consumer advocate at the National Consumer Law Center in Boston.

WHAT IT COSTS – Reverse mortgages are expensive, although the Housing and Economic Recovery Act of 2008 has partially addressed that. Origination fees used to be a flat 2 percent of the home’s value. The new law allows for 2 percent on the first $200,000, then 1 percent of any remaining value, with a $6,000 cap.

BE CAREFUL BECAUSE – If you take the money all at once or let your monthly advance build up in your bank account, your eligibility for Medicaid and Supplemental Security Income may be affected. “If you tap your home equity through a reverse mortgage and use it now for, say, a vacation, your nest egg won’t be there if an urgent medical or other need arises later,” says Jurgens.

Be especially wary of any salesperson who tries to get you to use a reverse mortgage to finance an annuity or long-term-care insurance. “The seller will likely pocket a big commission, and after factoring in the costs of a reverse mortgage, you are almost sure to lose financially,” says Jurgens.

IT MADE SENSE FOR – Mary Falso of Goodyear, Arizona, who retired with a pension and Social Security from her job at the Veterans Administration. Each month, the 68-year-old struggled to pay her mortgage and a home equity loan, which totaled $900 a month. Fearing she’d have to go back to work, she opted for a reverse mortgage.

Falso was able to pay off her traditional mortgage and home equity loan, totaling $110,000. Her monthly expenses are now manageable, and she has $40,000 in a line of credit as a cushion. “Two words come to mind when I think about my reverse mortgage,” she says. “Financial freedom.”

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