Using the equity in your home for long-term care is an intriguing concept, but be sure you understand all of the implications. Once viewed as a dangerous and dubious strategy, the reverse mortgage is one that more seniors whose primary asset is thier residence are tapping to finance various retirement needs. There is an increasing interest is reverse mortgages. A growing number of individuals have begun to inquire about the possible use of reverse mortgages- that once much-maligned loan product that seemed to target and dupe a segment of society that can in the greatest financial need: seniors.

        Luckily, the Wild West days of reverse mortgages are coming to an end, thank in large part to the fact that the Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae) havae gotten into the industry. Their entrance has done wonders to lower interest rates and closing costs and standardized features on reverse mortgages, which in turn has encouraged national lenders such as Financial Freedom (Lehman Brothers' reverse-mortgage arm) and Wells Fargo to offer increasingly competitive products.

        Because there is still a good deal of controversy over what a reverse mortgage is or isn't, it's best to start with the facts. It's the reverse of a traditional mortgage in that it is a "rising debt, falling equity" deal designed for borrowers who want to spend down the equity in their homes while they live there without having to make monthly repayments. Reverse mortgages typically require no repayment for as long as you- or any co-owner- live in your home. They differ from traditional loans in these ways:
 

• You don't need an income to qualify for a reverse mortgage
• You don't have to make monthly repayments- ever.
• You can't owe more than your home's value, regardless of how long you live.
 

        Anyone 62 or older who has equity in his or her home is eligible for a reverse mortgage, though the average age of borrowers is 77. It's important for planners and anyone working with seniors to get to know the lenders in their area who specialize in reverse mortgages. Any good lender should run a spreadsheet that shows FHA and Fannie Mae offerings and at least one private product. There is also the Financial Freedom reverse mortgage, which unlike the FHA and Fannie Mae reverse mortgages, does not have a loan cap. While their interest and fees are more expensive, proprietary loans can provide a client who has a high equity balance with more funds.

        Keep in mind that rates on reverse mortgages are adjustable and readjust monthly, though for a higher rate, some products allow borrowers to lock in their rates annually. The older the borrowers, the more funds to which they're entitled. While a reverse mortgage continues to accrue interest as long as the loan is outstanding, a borrower can pay off his or her balance at any time. The lona must be paid off when the home is sold or an estate is settled. All the lenders mentioned in this article send borrowers monthly statements that show the payoff amount. They require, however, that any existing home-equity loan a borrower has be paid off at the time the reverse-mortgage proceeds are paid.

        Borrowers or their heirs are entitled to any equity that remains once the loan is paid off. For instance, if a borrower takes out a reverse mortgage of $120,000 on a $300,000 house and decides five years later to sell the house and move to Florida, he or she needs only pay off the balance (closing costs are almost always added) and interest. The borrower keeps the remaining sales proceeds.

        Considering all of a client's options is crucial, but it's also important to be realistic. For instance, home-equity loans or lines of credit often are touted as cheaper alternatives to reverse mortgages. While the tab for closing costs may be less, many seniors won't qualify for home-equity loans because they have little or no regular income. And with an apples-to-apples comparison of rates, planners may well find that FHA and Fannie Mae loans are a good deal less expensive. Selling a home also may be an option to unlock home equity without having to pay interest, but it's important to consider what capital-gains tax the client will incur. Clients' comfort level and wishes should dictate actions whenever fianancially feasible. Some people want to stay put in their homes, even if it is more expensive. In most cases, a reverse mortgage can be seen as an emergency resource to fund final years.