Reverse Mortgage

"It was overwhelming," says her daughter Barbara Hartell, who along with her three siblings was already contributing as much as $400 a month for her mom's care.

So two years ago, when a doctor suggested they look into a reverse mortgage, a loan that converts home equity into cash, the family jumped at the idea. Thanks to skyrocketing California real estate, Underwood's three-bedroom home was now worth $500,000. With her kids' backing, she pulled out nearly $300,000 in equity from jumbo lender Financial Freedom to put toward her continued care. "All these years she's taken care of the house. Now it's taking care of her," says Hartell.

Delores Underwood isn't the only one reaping the rewards of reverse mortgages, a viable way for house-rich, cash-strapped seniors to supplement their income and afford long-term care while staying in their home. The combination of climbing real estate prices and record low interest rates have contributed to a 67% increase in reverse mortgages in the past year. Just how much you can actually tap depends on your age, the value and location of the property, and current interest rates. There are only three reverse mortgage products, each with its own rules. The most popular product, the Home Equity Conversion Mortgage (HECM) from the Federal Housing Administration, has loan limits for different parts of the country (the highest being $261,609). Fannie Mae's HomeKeeper has a national limit of around $300,000, while Financial Freedom, a division of Lehman Brothers Bank, offers Cash Account loans for homes with a value of at least a half million dollars. Use the National Reverse Mortgage Lenders Association calculator (www.nrmla.org) to get an idea of what size loan your folks may qualify for through each product. (One note: They must be 62 or older to be considered.)

Once your parents qualify, the question becomes, what's the best way to use the money for long-term care? Borrowers can take the money out as a lump sum, as a line of credit or, with the HECM loans, in the form of fixed payments. They could also do a combination of all three. Here's one advantage to going the line-of-credit route: While your folks wait to use it, the credit line will grow with interest, 3.59% for the HECM and 5% for the Cash Account (as of mid-October). So if your parents take out a line of credit for $100,000 on a Cash Account and don't touch it, by the end of the year they'll have $105,000. They could then use that $5,000 to pay for the annual premiums on a long-term-care policy and still have the original equity intact.

Another benefit: Once the American Homeownership and Economic Opportunity Act of 2000 kicks in (probably within a year), anyone who takes out a reverse mortgage to pay for long-term-care expenses can waive the 2% insurance fee on FHA loans.

The problem with reverse mortgages? First, they don't come cheap. There are origination fees of up to $6,000 on a Fannie Mae loan, for example, and closing costs as high as $12,000 on a $150,000 loan. Also, your folks will face a lengthy application process that includes, among other things, mandatory counseling. Diana E. Watkins, a professor in Santa Clarita, Calif., had to wade through streams of paperwork to help her mother,

Esther Ormston Sell, pull $135,000 from her home last year. Then, on the day of the signing, they couldn't close because Sell had no picture ID (she had never worked or driven a car). "The banker told me that this is one of the biggest problems with women of my mother's generation," says Watkins, whose mom's attorney had to vouch for her identity.

You'll also have to use good judgment when considering a reverse mortgage. Given the costs of the loan, it is not a prudent way to cover short-term cash-flow needs. And sometimes it simply makes more sense to sell the house. For example, if your parent is diagnosed with a terminal illness and has only a couple of years to live, selling the house would provide more cash than a reverse mortgage, says Tom Scabareti, vice president at Financial Freedom.

For all the possible drawbacks, the loans can obviously be worth the effort, as Diana Watkins and her mom realized. A few months after she had secured her loan, Sell suddenly passed away — but in the place she always wanted to, her home. A reverse mortgage, Watkins says, assured her mother's dignity and brought them both peace of mind. "From the time I was little," Watkins says, "I remember my parents saying to me that they didn't want to be put in nursing homes. I'm very glad I was able to do what she wanted."