The Motley Fool: Reverse mortgages can set you back

Reverse mortgages are getting a lot of attention lately. Here’s what you need to know about them.

With a reverse mortgage, a homeowner receives a lump sum or regular payments based on the equity of his or her home, usually to help fund retirement.

They’re not always a good deal. The points and fees they charge can be fairly high, and their interest rates can be considerably higher than those for regular mortgages. The cash flow you can expect from a reverse mortgage is determined by your home’s value, your age and interest rates. Those 62 years old or older, with little or no debt, stand to benefit the most from reverse mortgages. Loan programs vary widely in what they offer, so shopping around is critical. Retiring the debt usually means selling the home — often upon the death of the borrower — unless the heirs can cough up the repayment.

The bottom line is that reverse mortgages are generally not the best way to finance a retirement, though for some people they make a lot of sense. Look into alternatives, such as home equity loans, or consider selling your home, moving to a less expensive dwelling, and investing and living off the difference. Note also that getting a reverse mortgage might affect your eligibility for certain benefits such as Medicaid and Supplemental Security Income (SSI).

On the plus side, though, reverse mortgages can offer a line of credit that seniors can draw on whenever the need arises. While a home equity loan may cost less to secure than a reverse mortgage, it requires monthly payments. Reverse mortgages enable seniors to convert some or all of the equity in their home into tax-free income without having to sell it or take on a new monthly mortgage payment.

Learn more at www.fool.com/homecenter/ refinance/refinance08.htm, www.hud.gov/buying/ rvrsmort.cfm, www.con sumersunion.org/finance/ revconwc899.htm and www.reversemortgage.org. Or read “Reverse Mortgages for Dummies” by Sarah Glendon Lyons and John E. Lucas (For Dummies, $17).

Ask the Fool

Q: What’s a hostile takeover? — B.L., San Ramon, Calif.

A: A friendly takeover involves one company agreeing to be bought by another. Managers from each firm will typically meet with each other and will freely share information about themselves.

That’s not how it works in a hostile takeover, where the acquisition target is neither thrilled nor cooperative.

In a hostile takeover, the would-be acquirer typically sees some strategic value in another company. It may make friendly overtures and be rebuffed. If so, it may then move on to dealing directly with the target’s shareholders by offering to buy their shares from them for either a certain amount in cash or an exchange of stock. If enough shareholders respond, the acquirer can gain control. In order to entice shareholders, the offer will generally be for a price significantly higher than the target’s current stock price. (Companies whose share prices have slumped are extra-vulnerable to takeovers.)

Q: Should I pay off my college loans as soon as possible, or stick to the long-term repayment schedule? By paying slowly, I can begin investing in stocks sooner. — C.I., Mason City, Iowa

A: It all boils down to interest rates. If you’re paying 7 percent on your loans but you expect to earn 10 percent annually on your investments, then you’ll likely take in more than you pay out, if you pay on schedule. If your debt is costing you more than you expect to earn, pay it off pronto.

My dumbest investment

A few years back, when I was younger and more impatient and when the market was generally tanking, I let some smooth-talking idiot talk this smooth-listening idiot into letting him pick stocks for me. What a bad idea. He suggested shorting stocks (essentially betting that they’ll go down), which seemed to make sense in a generally down market. Within a few months, my $10,000 had become $25,000. But this guy could not pick stocks to save his life, and he held on to stocks for just a few days or weeks, at most. I ended up losing $50,000. Lessons learned: Pick your own stocks based on your own research. Know what you’re investing in. Buy high-quality companies for the long term. Invest. Don’t gamble. — Joe, Santa Cruz, Calif.

The Fool Responds: Excellent lessons. Shorting stocks can be effective, but it’s not easy. After all, you’re working against various companies’ efforts to see their stock rise. Short holding periods are also alarming. If you really understand and believe in a solid, undervalued company, aim to hang on for a while.