Clair once suggested that his father sell his home and move into a retirement community, which could provide assisted living when needed. This idea did not suit him at all. Even though the rest of the family agreed, he insisted, "This is my home and I want to stay here until I die."

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Fortunately, he could afford to do that. The home was paid off and he was not incurring large medical bills. However, what do you do if your parents can't afford to stay in their home and they don't want to move? Here is another option to consider -- the reverse mortgage.

What is a reverse mortgage? It is a tax-free loan available only to homeowners age 62 and older. The homeowner essentially borrows from the equity in the home and receives money in a lump sum, regular payments, a line of credit or a combination of these methods. This loan is then repaid when the home is sold.

Minimum qualifications:

• Everyone on the note must be older than age 62.

• You must own and occupy the home as your primary residence.

• The home must pass an inspection. If repairs are needed, proceeds from the reverse mortgage are used to fix the problems.

• Unless you own the home free and clear, the proceeds must also pay off any existing mortgage loan.

• Currently more than 90 percent of the reverse mortgage program funds, commonly called Home Equity Conversion Mortgage, are federally backed by the Department of Housing and Urban Development. The only additional HUD requirement is that homeowners must go through counseling to ensure they understand the ramifications of the program.

THE COSTS

Though advertised as a tax-free loan, a reverse mortgage is not interest-free. Interest is charged on the advanced funds, and the debt grows each month. Depending on the terms, the mortgage can be a fixed or variable interest rate. The interest cap, over the life of the loan, could be a whopping 10 percent or higher. Terms, interest rate and fees vary with lenders, so shop around to get the best terms.

The cost of obtaining a reverse mortgage can be deducted from the available funds, so the homeowner doesn't feel the same impact as paying with a separate check. However, the cost then becomes part of the debt. Also, the cost estimates appear to amount to a sixth or more of the borrowed amount -- a hefty bite out of your equity.

Of course, you still have to pay the normal taxes, utilities and other upkeep expenses. Additionally, you lose the annual interest deduction for your residence on your income tax return. Plus, you cannot deduct interest paid in a reverse mortgage until the total is paid. The longer you live, the larger the debt grows and could accumulate to a point that the property is worth less than what is owed.

The loan is repaid when the last borrower dies, the home is sold or it no longer is the primary residence.

THE RISK

Sounds relatively simple and easy, with great benefits to older homeowners -- but is it?

What is the appeal of a reverse mortgage? The reasons advertised and promoted are to supplement limited monthly income; pay for home improvements or repairs; or pay for "toys and adventures." This promotion sounds like the same materialism that got us into the current economic problems and credit crisis. With current loan limits as high as $625,500, a homeowner could be enticed to extract the equity before real need occurs.

Who makes money in a reverse mortgage? The lender does, on the interest accruing against the borrowed amount, even if the homeowner lives longer than anticipated. The homeowner has his or her funds and a place to stay.

However, what if the debt on the property (with interest accruing) is more that the property is worth? Who pays the difference then?

If HUD federally insures the loan, eventually all taxpayers cover the debt. HUD takes over if the property goes into foreclosure, if the proceeds from a sale are less than what is owed (amount borrowed plus accrued interest), or when the borrowed amount reaches 98 percent of the maximum limit set at closing.

More information about reverse mortgage is available at the AARP, HUD and Federal Trade Commission Web sites -- just search for "reverse mortgage."

OTHER DETAILS

What else should you know? There are plenty of scam artists targeting homeowners over 62 years old. Be careful of:

• Home repair services promoting reverse mortgages as a way to pay for improvements.

• Recommendations or requirements to use the proceeds for other financial products, such as annuities or long-term care insurance.

Whatever you do, if you decide to go with a reverse mortgage, shop around for the best terms with the lowest costs.

Overall, a reverse mortgage is not for most people. Explore all of your options before deciding to go with a reverse mortgage.

Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Anchorage Daily News. Their e-mail address is info@ramseyteam.com.

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