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Are Reverse Mortgages a Sound Estate Planning Tool?

Is a reverse mortgage a good financial move? Well, the answer to that question is the same as just about all legal questions - it depends. For some people, a reverse mortgage may turn out to be a good estate planning decision that allows them to use their home equity. For others, it may turn out to be an expensive way to get some quick cash, but not enough to solve their financial problems.

For those not familiar with a reverse mortgage, they are essentially a mortgage product that allows a homeowner aged 62 or older to convert a portion of their home equity into cash. The homeowner can typically elect to receive a monthly payment, a line of credit, or a lump payment. In return, the lender is paid back the loan, with interest, when the homeowner sells the home, fails to pay insurance or taxes, or passes away.

A reverse mortgage may make sense for certain people, i.e. those that have significant home equity and plan to stay in their homes long term. However, they won't work for everyone. If you end up having to move, you will be required to pay the money back with interest, most likely at a time when you cannot afford to do so.

Previously, reverse mortgages had another big disadvantage, they were typically quite expensive. High upfront fees made in difficult or impractical for many to take advantage of this option. However, the Federal Housing Administration (FHA) recently introduced a new type of reverse mortgage with lower upfront fees, which might make them more affordable and attractive to more people.

In the end, whether or not a reverse mortgage is right for your situation takes some careful consideration. If you would like to explore this option, it is best to talk to an experienced attorney to make sure you have all of the information you need.

Source: The Wall Street Journal, The reverse mortgage gets a makeover, Anne Tergesen 1/8/11

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