by Archie M. Richards, Jr.
December 18, 2006

Jean and her husband were both 74. Their home was worth $400,000, with no mortgage. She wrote to ask me whether they should take out a mortgage and invest the money. In a column submitted on November 20, 2006, I advised that they borrow no more than a third of the home's value, but not borrow at all unless they could handle the mortgage payments even during periods when the investments perform badly.

Jeffrey Reeves, a life insurance agent of Denver, Colorado, has pointed out correctly that a reverse mortgage would have been a better suggestion.

A reverse mortgage is a bank loan secured by the house. You can receive the money up front or in increments for life. As with a regular mortgage, the money received is tax free. You can use it for any purpose, including taking money up front for investment.

With a reverse mortgage, no payments are required. When you move or die, the mortgage can be paid off however you or your heirs prefer. Most people sell the house and pay off a reverse mortgage from the proceeds.

If the proceeds are greater than the mortgage balance, you or your heirs would receive a check for the difference. But if the proceeds are less than the mortgage balance, the bank eats the loss.

Both a regular mortgage and a reverse mortgage would provide money up front for Jean and her husband to invest. But here's the major difference between the two approaches:

• With a regular mortgage, the money used to make the mortgage payments would be unavailable for investment.

• With a reverse mortgage, no mortgage payments are needed until Jean and her husband move or die. Money that would otherwise be used for mortgage payments can indeed be invested. Those amounts are in addition to the proceeds of the reverse mortgage invested.

A reverse mortgage means that after Jean and her husband move or die, their investments would remain intact. The mortgage would probably be paid off from the sale of the house. In effect, a reverse mortgage turns the house into money up front.

Which kind of mortgage they choose might depend on what the children prefer to inherit: investments or the house. In many cases, the children prefer investments, because they own their own homes and have jobs elsewhere.

Some people want a reverse mortgage to pay off their primary mortgage and avoid further mortgage payments. Others want to receive regular income for life. No problem in either case.

You can obtain a reverse mortgage 1) if your house is owned jointly, 2) if it's owned by a living trust, or 3) if it's owned jointly by the living trusts of both spouses.

You must be at least 62 to obtain a reverse mortgage. To retain it, you must keep the house in good condition, pay your property taxes, and avoid bankruptcy. But you probably intend to do those things anyway.

Because of up-front costs, don't obtain a reverse mortgage if you plan on remaining in the home for only 2 or 3 years.

Let's say you obtain a reverse mortgage at age 65 and arrange to receive income for life. Assume you live longer than your life expectancy and die at home at age 115. For 50 years, the interest builds up and up, while you make no mortgage payments.

After your death, the home is sold. The proceeds would probably be insufficient to pay off the mortgage. But your heirs would lose nothing, because the bank would absorb the loss.

You're never stuck with a reverse mortgage. You can terminate it at any time and pay off the balance in any way you like. You remain the homeowner.

From http://financialfreedom.com/reversemortgagecalculator, you may obtain estimates of what reverse mortgages from various sources might do for you.

Consider a reverse mortgage. It can turn your house into money without moving out.