Insurance: Disaster versus Annoyance

My father, who was pretty savvy about money, once told me, "You always insure for the disaster, not for the annoyance."

What did he mean by that? 

Don't use insurance to avoid minor financial blows, only the ones that are going to knock you down and out.

I'm watching a commercial for a major insurance company. A lady has come into a "store" to buy "customized auto insurance," so customized that there's a little picture of her on the box. (Yes, in this admittedly amusing fantasy world, insurance comes in a box.) She wants "a lot" of insurance (a little "gas tank" style dial appears, showing almost full)  but, no, she wants "a little less" (the gas tank dials itself back to three-quarters full) "a little less"(we're now down to a little bit above half) "and a low deductible."

It's an amusing commercial, pleasant and friendly. However, this is not the way you should buy insurance...of any type.

Let's face it. As I've said elsewhere, most of us only have so much money to spend on insurance. We need to be careful to spend it wisely.

As an example, let's talk about auto insurance. 

There are two main types. One covers repairing damage to or the loss of your car; the other involves damage to everything else, including people.  (You can also buy insurance to pay your medical bills if you're injured in a crash, and insurance to pay you if the other driver is at fault, but has no money and no insurance.) 

Collision insurance repairs or replaces your car if it's involved in a crash: you run into another car, a lamp post or a 2000 lb Brahma bull. (Don't laugh; I once saw one strolling down the Texas road on which I lived; I called the sheriff, and he sent someone to round it up.)  Comprehensive insurance covers just about anything else that might damage your car--a tree falls on it, a tornado takes it to Oz, a graffiti artist uses it for a canvas or someone steals it. 

Collision and Comprehensive almost always involve a deductible. You can choose the amount, usually starting at $500. The amount the insurance company will pay will be either the cost of repairing your car or the cost of replacing it--less the deductible--at your car's current market price.  Keep that last phrase in mind; we'll come back to it later .(To prevent people from trashing their own car when they need money, some insurers will always pay less than the replacement cost. Check your policy.) 

The second kind of insurance is liability insurance. This is insurance to cover damage that you are responsible for, especially if you are judged negligent in some way. You hit someone's car or run into their house (it happens!) or hit them because of those worn tires, or because you didn't see a stop sign, or because you were texting someone and this insurance provides money to repair or replace their damaged car or property, for medical bills or to pay damages if you are sued  Most states now require drivers to have a minimum amount of liability insurance. Drive without it and you can be fined or even jailed.

And this is where the "annoyance" versus "disaster" situation shows up. 

Far too many people worry first and foremost about repairing their damaged car. They buy Collision & Comprehensive with a low deductible, and skimp on liability insurance. But a higher deductible--say $1,000-- means you'll only be out of pocket $500 more  if your car needs to be repaired. That's a financial annoyance.

You don't think so? Then skimp on liability insurance;  if you seriously injure or kill someone, you are now at risk for losing, not a car, but everything you own...and then some. That's a financial disaster.

Here's a hypothetical example.

Ruth and Amy both buy identical new cars that cost $18,000. They both budget the same amount of money to spend on car insurance.

Ruth buys C & C with the lowest possible deductible, $500, which means that if her car gets damaged, she's only out $500 to get it fixed or replaced.  A low deductible costs much more than a high deductible though,  so she opts for only $50,000 worth of liability insurance, the minimum her state requires.

Amy opts for C&C with a $1,500 deductible, which costs much less; with the savings, she buys $300,000 worth of liability insurance.

Five years into their car ownership, both are involved in major crashes. They aren't injured, but other people are. Both Ruth and Amy's cars are totaled.  Ruth was texting on her cell phone when she crashed; Amy failed to see a stop sign.

Both are sued by those injured for $350,000 in medical bills and damages.

Ruth contacts her insurance agent and is stunned to find that they will only pay her the current market price of her five-year-old car, approximately 40% of what she paid for it, less $500. The court awards those suing her a total of $250,000; her insurance carrier pays her $50,000, the full amount of her liability insurance. She has no savings,and owns no property other than her car; she will therefore spend decades paying off the additional $200,000. For her, this is a financial disaster.

Amy is paid $1,500 less than Ruth towards replacing her totaled car. But she has $300,000 of liability insurance, enough to make it worth the insurance company's while to negotiate with the lawyers of those who are suing her. They agree on a settlement of $190,000, which the insurance company pays. Amy is able to  buy a decent used car and goes on with her life.  Even if she'd had to pay $250,000, like Ruth, the insurance would have covered it.

Because she was willing to risk paying $1,000 more to replace her car, this has been a financial annoyance.   

Consider risks versus cost when you buy insurance....and buy protection for the financial disaster, not the financial annoyance.  

MTS Article on Carnival Of Money Stories #93

My article "One Expense No Homeowner Should Ever Forget" has been selected for the Carnival of Money Stories #93 on Your Money Relationship. Thanks, Adam, for including my reminder that you never can anticipate when something--in this case a hot water heater that literally split its seams--will result in a big bill.

One Expense No Homeowner Should Ever Forget

Home buyers who do their homework try to anticipate exactly what that home will cost them: down payment, points, fees, the mortgage payment itself, taxes, insurance....

But there's one expense that you should always add into that total, because forgetting it can hit you with the need to come up with a fairly large chunk of change, often with little prior warning.

What is this expense?

Maintenance costs.

Once you sign those papers and are handed that key, you are now the person responsible for making sure everything works, from the roof to the heating system to the plumbing. You don't get to call the landlord anymore when the living room ceiling starts to drip or the air conditioning conks out or the toilet backs up. You are now the one who has to either figure out how to fix things yourself, or somehow come up with the money to hire a pro.

And here's something that any longtime homeowner knows: if somethings going to break, it'll break at the worst possible time.

My neighbor called me late on the afternoon of December 24th. "Do you have water pressure?"

It's been so dry around here lately that our local water company has been plagued with leaks, so
we've been experiencing periodic cuts in water pressure. (Parts of Texas are notorious for the
tendency of the local clay soil to "settle" and bust pipes.) But this, unfortunately, was not the
case this time.

I checked and got back on the phone. "I've got full pressure."

"Oh, hell. We were just getting in the car to go to my mom's for Christmas and I came back in to get something and heard water running through the pipes, but I don't have any pressure. So it's leaking somewhere, and what do you want to bet it's in the slab?" She was almost literally grinding her teeth.

I pointed out that at least she'd discovered this before driving away, so she could cut the water at the meter and not come home to a flooded house.

As it turned out, she was lucky; a length of PVC had pulled out of a joint just beyond the slab in the dirt and with a little digging, sawing and gluing, her husband was able to fix it when they got home.

I was not so lucky.

New Year's Day, and I was at my computer when I heard what I can only describe as a thwang coming from my hall closet. I'd never heard a sound quite like that before. I poked my head in through the closet door, thinking that perhaps Snark, the Ugliest Cat In The World, had somehow been shut inside and knocked something over. Nope, no cat. All quiet. I use half the closet as a pantry and the other half houses both my heat pump's interior unit and my water heater, both side by side on a low wooden platform. I peered around the water heater and in all the corners. Definitely no cat.

I went back to my computer. A few minutes later, I heard another thwang and then a bang.

Suddenly, water started streaming out a bottom grill located under the heat pump. I jumped up, stuck my head back in the closet and found water pouring out of the mid-section of the water heater.

I ran to my utility room and switched off power to both the water heater and the heat pump, ran back to the closet, pulled off the grill and tossed every towel I had handy under the platform to absorb the water, which turned out to be less than one might think, given that this was a fifty-two gallon tank. With the assistance of a small mirror, I found that the tank's seam, which was facing the wall, had simply split halfway up.

Ah, the joys of homeownership.

My friend had again gone out of town. I have a key to her house. I took my evening shower up there that night, walking home through her pasture in my bathrobe and parka.

The next day was spent in visits and calls to every place within twenty miles that sold water
heaters. The initial stop-in at Lowe's almost gave me a heart attack; fifty gallon heaters cost a minimum of $300. I listed all the brands available, got on the internet, found a rating site and found that the brand of my old heater was near the top of the list. Since it was warranted for six years and had lasted sixteen, it seemed the logical pick.

Next job? Schedule a plumber. I called three and the lowest price to replace the heater, with me
buying the tank and bringing it home myself, was $350.

Luckily, I moaned a bit about this to the lady at the store where I went to get the tank and she had me call her husband, a licensed journeyman plumber who did side jobs on the weekends and agreed to charge me $200. I also lucked out in that the next day was warm. In North Central Texas, the temperature in the winter depends almost entirely on which way the wind is blowing and you can go from low 30s one day to 70s the next down to low 30s the next, which is exactly what happened. We had one warm day to get the tank in and working, and considering that it took 45 minutes just to drain the old tank using a hose run out the front door, we needed it.

Total cost? $324 for the tank, $200 for the labor. Ouch.

Not all home maintenance expenses will be this costly, especially if you learn to do some kinds of
work yourself. Like many home owners, I've learned to do a lot of things, from unplugging toilets to snaking out drain pipes to the one memorable time that I replaced an entire bathtub and surround. (It was a mobile home and the bathtub and surround were plastic, light enough for me to lift by myself.)

I've hooked my main drain to a septic tank, I can replace or repair most leaking water shut-off valves, and I've replaced more toilet tank valves than I like to think about.

But somethings I can't or won't do myself. For example, I've paid to get shingles replaced on my very sloping roof and I've paid quite a lot to get my heating/AC fixed. (I don't want to risk sliding off a roof, and I won't mess with anything both complicated and electric.)

Almost any homeowner will have similar stories. Eventually, even the best fridge, dishwasher or dryer will go south. Eventually, even the best roof will spring a leak. Eventually, even a top-of- the-line AC unit will leak freon or just plain give up the ghost.

Since you often can't predict when such things will happen, you should always add at least 5%
extra to your estimated monthly costs of home ownership, then set that money aside to build up a repair fund. If you can't set aside that extra 5% comfortably, think long and hard about buying that particular house. Almost any company that does repairs on your home can put a lien on your house if you fail to pay. You don't want to end up choosing between having no heat or no running water... or having your credit ruined and, potentially, your house taken away from you.

A little money banked for home repairs can make that difference. So remember to allow for it...before you buy the home.

Debt: Make Those Payments on Time, Pt. II

Another payment you really need to make on time is your mortgage or rent payment. Going into default on these can not only lose you your home, it can downgrade your credit rating so badly that finding a new place to live will be a major challenge.

One problem with mortgages is that often your mortgage holder is not a local institution. Mortgages are now routinely bundled and sold, then sometimes sold and sold again, with each seller taking a bit of profit. (Many experts are saying this is part of the reason for the economic mess we're now in.) A mortgage held by your friendly neighborhood bank is the exception, not the norm. I'm fortunate enough to have my lender, the original issuer, less than 20 miles away, and on more than one occassion, I've made that 40 mile round trip in order to get my payment in on time.

Why? What happens if you're late? First, if you don't already know, find out if you have a grace period, and now long it is. (But don't take those extra few days as a given. Some lenders are shrinking the amount of leeway they give homeowners.) If you don't get your payment in before the end of the grace period at the latest, you're now a payment behind, and many lenders will hit you with a late fee.This can happen as quickly as fifteen days past the due date.

This can be the beginning of a downward spiral. Such fees may make it even more difficult to bring your payments current. Miss a few more payments and, according to the the Department of Housing and Urban Development, your lender can begin to assess you its attorney fees. You heard that right; you may be expected to pay the legal fees incurred by the lender in trying to force you to bring your payments current.

You don't want to get that position. If you're struggling, do every thing you can to stay current. If you miss a payment, pay it and any late fees as quickly as possible. If you can't, contact your lender and try to work something out. HUD also has counselors who may be able to help you.

Renters, don't count on being able to sweet-talk your landlord into letting you pay late. With credit as tight as it is, few landlords will do this, and a single late payment may start you on the road to eviction. If you can't make your payments, don't ignore the problem. Start looking for something you can afford. Skipping payments, or even worse, being evicted, will seriously damage your credit rating and make it next to impossible to rent a new place.

Some readers may accuse me of being negative here. Well, here in rural Texas, we have snakes. Rattlesnakes, copperheads, cottonmouths, deadly all. Which is why, when I go walking through tall grass or weeds, I wear high boots and watch where I'm walking. And I'm careful lifting up rocks or anything else that's been lying on the ground awhile. Because I know there are snakes out there, because I know where they're likely to be, I can walk my land and do my outside work in relative safety. Knowing what might get you in to trouble, and how to avoid such situations, isn't negative, it's sensible....and good sense is what we all need more of now.

Budgeting, Part IV

Having spent some time tracking your cash spending, you now have a lot of information on how you spend your money. Now it's time to start fitting the pieces together.

I'm assuming you're putting together a budget at least in part because you aren't happy with your current financial situation. Maybe you're getting deeper and deeper in debt and you're need to know why. Maybe you're just coming up a bit short every month and you'd rather break even. Or maybe you have enough to live on, but you'd like to put some money into savings. A budget is a great tool to help you towards your specific goals. I'm going give you suggestions on what you should do with all this information, but feel free to do things differently if that better fits your situation.

I suggested at the beginning of this series that you start by putting your income and your checking and credit card expenses on a monthly basis. Do the same with your cash purchases. Months vary in length, so a good formula is to count an average month as 4.3 weeks.

Add your reliable income sources up to create a monthly total. Is it what you expected? Are you sure you've included everything? Did you leave out income that you can't really count on, such as certain types of bonuses and commissions?

Then add up your "must pay" and unalterable expenses, which basically are income and property taxes, plus any court-mandated payments such as alimony, child support or judgements you must pay. These are checks you must write each month.

Next comes what I call "semi-discretionary" expenses. These are items that are difficult but not impossible to change. Mortgage or rent payments, basic utilties (this does not include cable or satellite TV!) Health, life and car insurance, car payments, landline phones, day care expenses, credit card payments, car maintenance and so forth.

Next comes "discretionary expenses." These are things you can change relatively easily. Food,clothing, entertainment, vacations, furniture....

When you've placed everything in a category, add up all your monthly totals and compare that to your income. Hopefully, subtracting your expenses from your income leaves a postitive number. If not, and increasing income is not an option, it's time to start looking at how you can cut your expenses. How big is the deficit? A few bucks short each month is an easy fix, but a significant amount will require some serious changes. Again, only you can determine what your needs are.

This is why I suggested you sort your expenses into the categories above. If, for example, you need to cut expenses by less than 10%, its time to start looking at ways to ease off on your discretionary spending. (You'll find some suggestions on this blog.) For example, you might start checking out books and videos from the library instead of buying them, or drop to a lower tier on your cable. If you find that you're spending a lot of money dining out, start eating at home more often or taking lunch to work. If you have a lot of overcharges on your cell phone, check for a better "unlimited" deal...or figure out a way to use your phone less! The savings from a few changes like this might be enough to get you back into the black.

If you're in real trouble, though, you may need to go to the "semi-discretionary" items. It may be time to trade your gas guzzler for a good, used gas-sipper, or if you have two cars, see if you can get by with one car and public transport. (Remember, one less car also means less insurance and maintenance costs.) If deeper cuts are necessary, can you move to a cheaper apartment or smaller house? (Check what expenses may be involved before making this decision.)

Talk with your family to come up with ideas. It's best not to play the "blame game" but instead work together to see who can cut what. If everyone can pitch in, it will be much easier to reach your goals. Good luck!

Banks: Comparing Apples to...Financial Grenades (Sneak!)

"Sneak" is my term for marketing and advertising pitches and practices that are probably within the letter of the law , but almost certainly intended to mislead.

Once again, I’ve received a marketing letter from a major bank. This one is pushing that darling of the banking industry, the home equity loan, a loan that’s absolutely wonderful….for the bank.

I didn’t even have to read the fine print to know this one was a Sneak. The less-than-honest information was on the front page, in the form of a comparison of how much money could be saved consolidating debts into a home equity loan from this bank.

The hypothetical debts listed were:

* a regular credit card with a 15.9% interest rate and a balance of $30,500
* a department store credit card with a 19.9% interest rate and a $14,000 balance
* an auto loan with an 8.69% interest rate and a $45,000 balance.

$89,500 of debt total, with, according to the bank, a total monthly payment of $1,650.04.

The letter says that if I got this home equity loan, the monthly “interest-only” payment on this hypothetical debt would be $298.33, based on an interest rate of 4%.

Wow! I’d save over $1,350 a month! Give me a pen! Let me sign this thing now! "$1,350 less! $1,350 less! Go team!"

Uh-huh. Sykes, put away your pom-poms. Let’s take a slightly closer look at this thing.

“Interest only?” Most loan payments are a combination of two things, an interest payment and a principal payment, interest being the money you pay for borrowing money, principal being the actual amount borrowed. So each time you make a "principal and interest" payment, you’re paying back some of the principal, thereby reducing the amount of money you owe. But in this example, with an interest-only payment, I'd pay nearly $300 a month…..and no matter how long I paid, still owe the same $89,500.

In other words, with an "interest-only" payment, a borrower essentially pays each month to “rent” the money.

So comparing a regular payment to an interest-only payment is not exactly kosher. (Actually, it's a classic Sneak.)

Let’s suppose that a hypothetical debtor, with credit good enough to qualify for such a loan, instead found a bank or credit union that would give him a consolidation loan for $89,500 at a fixed rate of 7%.

Based on a payback term of ten years, he’d pay $1,039.17 per month. With a slightly lower interest rate or a longer loan term, he'd pay less. The important thing is, eventually he'd pay off the loan.

But—but—but—you say—according to this letter, the interest rate on the equity loan would be only 4%! Isn’t it always better to pay a smaller interest rate? How can you beat 4%?

A reasonably good argument, except for one thing. A bit of fine print on the back of the letter informs us that this is a variable rate. As many people have discovered lately, variable rates are tricky things. A four percent rise on that 4%--an entirely possible scenario--would hike that “interest only” payment from $298.33 to $596.66…and our debtor still wouldn’t be paying off the loan.

But the Sneakiest part of this whole pitch? Mr. Debtor, already in hock for a $89,500, wouldn’t qualify for that 4% rate in the first place! According to the fine print….

(…read the fine print. Always read the fine print…)

….the rate offered only applies to loans over $100,000! So unless our debtor’s willing to take on another $10,500 worth of debt, he’s not going to get 4%.

Add this to the scenario, too... if our debtor “does not meet the repayment terms”...which means, of course, if he misses a payment or two... his interest rate could jump instantly to 18%. (Darn that fine print!)

And at 18%, even an “interest-only” payment on $100,000 would be $1,500.

Plus, nowhere in this letter does it mention exactly how one does pay off this loan. No mention of length of term, or how much each monthly payment would be if it actually included some principal as well as interest.

I guess the idea is that anyone taking out such a loan is to “rent” that $100,000 for the rest of their natural life, paying anywhere from $333.33 (4%) to $1,500 (18%) a month. Nice. Really nice.

Is this offer looking not quite so good now? Yes?

Yes!

But here’s the final kicker, the thing you should always keep first and foremost in your mind when any financial institution offers you a home equity loan….

….if you can’t make the payments, they can take your home.

If you can’ t make the payments, they can take your home.

Does that mean you should NEVER take out a home equity loan? No....but the reasons, terms and conditions should be considered very, very carefully. And....

...read the fine print!

Home Prices: What Goes Up...

In the last few months, we’ve been given a pretty good example of one of the truest sayngs on record: The only constant is change.

After years of rising home prices, people are finding out that what goes up can also go down. What’s surprising is how shocked so many people seem to be, the number of homeowners now in serious trouble when it comes to their mortgage payments, and how many predictions of rising home prices are now proving wrong.

Today, for example, there was a story on the local TV news about a new subdivision full of $500,00 homes, perhaps half of them still unsold....and those that had been sold were now estimated to be worth $250,000 to $300,000. Their owners are stunned.

They shouldn’t be. There’s a fundamental rule of the law of supply and demand that many people don’t understand.....how much an item is worth depends on how much someone is willing to pay for it at any specific moment, not how much it orginally cost.

Anyone who’s studied history, or who’s old enough to have lived through a recession or two, finds this kind of situation painfully familiar. It wasn’t that long ago that thousands of people learned that the frenzied rise in the price of dot.com stocks could be followed by an equally frenzied fall. And that the seductive drumbeat of appreciation, appreciation, appreciation can be meaningless. The appreciation of real estate, like the appreciation of stocks, doesn’t put an extra dime in your pocket until you sell.....and if you sell at the wrong time, you can end up losing money.

As for those who listened to the glowing claims for mortgages with variable interest rates, they are now learning that they should have run the figures before signing on the dotted line. Instead, far too many of them listened to less-than-forthcoming lenders. "Go for that a low, low variable rate! Chances are the interest will never go up more than a few percent. How could that be a problem?"

Here's how.

I went to bankrate.com (a site that contains a lot of useful information) and used their mortgage calculator to figure out exactly how the increase in interest rates could affect a payment. This is for a $200,000, 30 year mortgage, and it illustrates the change in monthly payments created by a three-percent rise in the interest rate.

At 5.75% the payment is $1,167.15

At 6.75%, it’s $1,297.20

At 7.75%, it’s $1,432.82

At 8.75%, it’s $1,573.40.

In other words, a 3% increase in the interest rate results in a 34% increase in the monthly payment.

Shocked? Join the crowd.

And the many, many people who bought more house than they should have, because the low, but variable interest rate meant an affordable payment—at the time.

But now, as interest rates creep up, many of those homeowners are in trouble.....and promises that the appreciation of their home would insure that they came out ahead, no matter what, are proving equally false. What about those who were told appreciation, and the resulting increase in equity, meant they could take out home equity loans and use the money for whatever they wanted? In other words, use your home as a credit card! Some people are finding that they can’t make those payments either....and that they can lose their home for defaulting on a relatively small home equity loan.

If you’re in that situation, you have my sympathy. If you’re not, and you’re thinking of buying a home, look at that variable rate mortgage with a realistic eye. Run the numbers, and if you can’t afford the payment at the highest possible rate listed, back away and look for a lower, fixed rate mortgage. You may have to settle for a more modest home, but your fnancial situation will be much less precarious. Don't rely on appreciation to keep you out of trouble. Appreciation is never guaranteed.

And remember....the only constant is change.

Before You Call A Repairman....

www.repairclinic.com
If you need to repair an applicance, and you're short on sources for parts and information, this site can help.

Money from Home: The Reverse Mortgage

During the last few years as stock prices, dividends and interest rates plummeted, many seniors saw their monthly income drop as well. One way to supplement such income is to tap the equity in your home. Traditionally this meant either selling your home or taking out a loan and making monthly payments. But a new option is becoming increasingly popular: the reverse mortgage.

What Is It?

With a reverse mortgage or RM, homeowners can borrow money against their equity, but it doesn't have to be repaid as long as they remain in the home. If they move, the lender is repaid from the proceeds of the sale of the home. If they die, the home will be sold, the lender repaid and any money left over will become part of the homeowner's estate.

How Do I Qualify?

To qualify for a reverse mortgage, you and any co-borrower must generally be at least 62 years old, with a structurally sound home that's either paid off or carrying a very small loan balance. The amount you can borrow will depend largely on the market value of your home, the interest rate charged and your age at the time of the loan. The size of your income is usually not a factor.

Loan proceeds are most often paid to the homeowner as regular monthly advances, though some plans may offer lump sum payments or a line of credit. You can use the loan proceeds any way you wish: to supplement your income, pay off medical bills, or even for vacations or travel.

Do I Retain Title to My Home?

Yes, as well as full responsibility for home maintenance and the payment of property taxes and insurance costs. Though the loan balance grows over time as interest is added, you never owe more than the loan amount or the value of your home when the loan is repaid, whichever is less. You can't be forced to sell the home to pay off the mortgage, even if the loan balance grows large enough to exceed the market value of your home. (An exception would be a reverse mortgage with a pre-determined term.) However, your equity in your home declines as the balance of the loan grows over time.

Are There Different Types of Reverse Mortgages?

Yes. Reverse mortgages generally fall into one of three classifications: FHA or government insured, lender insured and uninsured.

° An FHA-insured RM protects the homeowner by guaranteeing that loan advances will continue to be paid to the homeowner if the lender defaults. Interest rates may be adjustable, though any adjustments will effect how fast the loan balance grows, while the monthly payment made to the homeowner stays the same.

·° A lender-insured plan may mean larger loan advances, but often involves higher costs, including mortgage insurance premiums. Some lender-insured plans include an annuity that makes monthly payments to borrowers even if they sell their home and move. Like any annuity, the financial strength of the company involved is important, so check it before relying on such a plan.

° Uninsured plans involve monthly payments for a fixed term. And the end of the term, the full balance of the loan must be repaid. The risk here is not having the funds to repay the a loan when it comes due. This type of loan may be useful for short-term needs, but you might first want to check alternate ways of obtaining funds, such as a traditional home equity loan.

What are the Advantages of a Reverse Mortgage?

If you have low or even no monthly income, you can still get a reverse mortgage, while continuing to live in your home. The loan money is tax-free. And unlike traditional home equity loans, the loan doesn't have to be repaid during your lifetime unless you sell your house or decide to move.

The Disadvantages?

The balance of a reverse mortgage increases over time, so if you decide to move and must repay the loan, you may find yourself with little or no equity left in your home. Reverse mortgages also tend to be more costly than other loan instruments in terms of fees, insurance premiums and servicing charges, though usually these costs can be rolled into the loan. The interest on a reverse mortgage isn't tax-deductible until you pay off all or part of your loan, and the income generated may change your eligibility for specific "need-based" benefits such as Medicaid or Supplemental Social Security Income. If you receive these benefits, check how an RM will effect them before obtaining the loan.

With a fixed-term RM, you must have the money available to pay off the loan when the term ends, or you may could be forced to sell your home, use the proceeds to pay off the loan, and be left with no home and little or no cash .

Some Words of Caution

Reverse mortgages tend to be more complex than traditional mortgages, so make sure you understand all the terms and conditions involved. It's probably a good idea to check with your attorney or financial advisor before finalizing an RM, or you may want to meet with a government-recommended RM counselor. Also, beware of anyone who offers to find you an RM lender for a fee, since such information is available for free. (To find a counselor or lender, see below.)

Where Can I Get More Information?

Information on reverse mortgages can be found at the Fannie Mae (Federal National Mortgage Corp.) website at www.fanniemae.com. (Click on the "search" button and enter "reverse mortgage".) Or you can call Fannie Mae at 1-800-732-6643 to obtain a free package of information that includes a list of participating lenders.

The U. S. Department of Housing and Urban Development (HUD) also has a wealth of information on their website at www.hud.gov/groups/seniors.cfm, including a comprehensive, downloadable booklet. At HUD's toll-free number, 1-888-466-3487, you can also get a referral for a HUD-approved reverse mortgage counselor in your area.

Www.reversemortgage.org is the website of the National Reverse Mortgage Lenders Association, a non-profit trade association of financial companies that make reverse mortgages. It provides general information, a state-by-state list of RM lenders and a calculator to help you estimate how large an RM you can qualify for.

A good source for comparing different types of RMs is www.reverse.org, the website of the National Center for Home Equity Conversion, a non-profit organization that provides consumers with information on reverse mortgages.

AARP provides a comprehensive overview of reverse mortgages at http://www.aarp.org/revmort, including a calculator and a downloadable booklet.