Weighing the risks of reverse mortgages

Q: My husband is 63 and considering early retirement. As part of our financial package, he has included a reverse mortgage on our home. I like the security of sole ownership. Are there any risks to reverse mortgages?
J.H., Del Mar, Calif.

A: You need to know as much as possible about your reverse-mortgage payer, including the lender's reputation and fees structure, says Paula Hogan, a financial planner in Milwaukee. And "what happens," she asks, "if you live many years?"

A reverse mortgage allows you to tap into the equity of your home. So instead of you making regular mortgage payments to your bank, the bank or mortgage lender pays you.

Homeowners can receive payment from a reverse mortgage in different ways. You could get a monthly check for a predetermined number of years, a credit line to draw on, or a single payment. Choose which option is best, based on your personal financial situation.

The size of the payout is determined by your age, your equity, and how long you expect to live in the house. Even when the payments end, Hogan says, you can remain in your house for the rest of your life.

Ms. Hogan recommends that you comparison shop to avoid excessive fees. Also check with the Better Business Bureau or state regulators to make certain the lender has a solid record.

Q: Can I make more than 12 monthly payments on my mortgage before Jan. 1 – In other words, make extra payments in this calendar year? Is it better to prepay by making more full payments in a year or by simply making larger monthly payments each month?
S.P., Arlington, Va.

A: "Most mortgages do not have prepayment penalties, but you will need to check that matter with your lender," says Hogan. If you do make extra payments before the end of the year, which are often done for tax purposes, make certain that the payments are posted for 2002, and not 2003, she says.

If you send an amount larger than your regular monthly payment, include a note. And remember, you will still have to make future monthly payments. You can't skip a month down the road.

How you boost your payments depends on your personal situation and the amount of extra cash or income you have. "Do whatever best fits with your circumstances," Hogan says.