A mortgage that pays you? Think twice

When the loan comes due

Reverse mortgages get even trickier in their repayment terms.

As long as you live in your home, you don't have to pay back the loan. You can leave your home for up to one year for health reasons, and it won't trigger repayment.

But once you move somewhere else, or die, the loan comes due.

Most people sell their homes (or their survivors do) to pay back the reverse mortgage. If the proceeds from the sale cover the reverse mortgage and then some, you or your heirs get to keep the profit, the same as selling a home with an ordinary mortgage.

Two strange benefits:

• If your home's value dropped and the sale didn't cover all the equity that you had tapped, neither you (nor your heirs, if you've died) would owe any money. The bank would take a loss.

• If you picked the monthly payment option for getting your cash and lived longer than expected, the monthly payments would keep coming, even if the total exceeded the initial amount of the loan.

Would it be worth it to you? New laws require homeowners to get counseling first to help them decide. But here are two scenarios to consider:

A tale of 2 reverse mortgages

Lisa Riggins, a member of the Women in Red who lives in Las Vegas, says that her grandmother, who is 71, recently took out a reverse mortgage, and that it was the perfect solution to a difficult situation.

Riggins' grandmother owned her home outright, and, thanks to a life insurance payment after her husband's death, she had no debts. But with the passing of her spouse, the grandmother's income was cut in half. "She could pay her bills, but barely," Riggins says.

Although her grandmother paid about $10,000 in fees to obtain a $150,000 reverse mortgage, Riggins says it has been worth it. "Her quality of life is so much better," says Riggins. "She doesn't have to watch what she spends, and we don't have to worry whether she can afford her groceries. It really was the perfect option for her."

That's not everyone's story.

As the reverse mortgage association's Bell emphasizes: "It's important to think through what your long-term plans are. You could get the reverse mortgage and spend down the wealth you've accumulated in your home -- and find you have more needs, but there's nothing there anymore."

This is what happened to Alexis Sheppard's grandparents. Sheppard is a member of the Women in Red who lives in Mesa, Ariz. When I spoke to her, she was packing for a trip to California, to help her grandparents, ages 75 and 76, file for bankruptcy.

"The irony of all of this is that 10 years ago, my grandparents had paid off their house in full," Sheppard says. "They were doing fine."

They took out a first mortgage several years ago to fund a business venture that went bust. Next, on the advice of a relative, they took out a reverse mortgage, in one lump sum.

"Everything might be different if they had taken out the loan in monthly payments," says Sheppard. "Then they would have used those smaller amounts for living expenses."

Instead, Sheppard says, her grandparents viewed the loan as a windfall, and they spent it. "They redid the floors, installed new carpets, bought new furniture."

Of course, the reverse mortgage didn't lead Sheppard's grandparents into bankruptcy. But by not understanding the complexity of the loan -- or their own financial needs -- it pushed them faster into a downward slide.

Now, Sheppard hopes, the reverse mortgage may turn out to be their one saving grace. "As long as they live in that house, they don't have to pay back the reverse mortgage," she points out.

And because the reverse mortgage paid off their first mortgage, they won't have monthly payments either.

If they can square away their other debts through bankruptcy, she says, "maybe we can work out a budget, so they can return to normal living."

Published Nov. 19, 2008

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