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SMART MONEY

Reverse mortgage not right for everyone

Tuesday, February 19, 2013 - 12:01 am

Q.: My husband and I are trying to retire but did not manage to save enough to supplement our Social Security pensions. We have three small IRAs, but they will not last long enough.

We are contemplating obtaining a reverse mortgage on our home. It is worth about $300,000, and we have a line of credit on it of about $49,000, which would be deducted from the amount of the reverse mortgage.

Is this a wise choice for us? I am 67, and my husband is 72. We would need to use only $20,000 a year from this mortgage to afford us the quality of life to which we are accustomed. Please advise us on this matter, as we find your advice to others very wise. – P.D., via email

A.: You are considering a reverse mortgage net of about $250,000 ($300,000, minus the $49,000 line of credit), which would probably give you no more than $125,000 on the reverse mortgage. That would give you about $20,000 a year for perhaps eight years, considering the interest on the investment. Then what? That's the problem. A reverse mortgage could be a short-term solution, but it's not a long-term one.

Another option would be to sell the house, rent a place instead and walk out with $250,000. Invested at 7 percent, this could give you $15,000 to $18,000 a year income without attacking principal. While you may not be happy about selling the house, it seems to me that now would be the time to unload it and invest the money. This might change your style of living, but wouldn't it be better to consider that now than to take the reverse mortgage, dissipate the money and then be out of options?

For a lot of people, a reverse mortgage is a good answer, but I don't think

Send questions to bruce@brucewilliams.com or to Smart Money, PO Box 7150, Hudson, FL 34674. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.