The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping their home equity has become an attractive but potentially risky option. A reverse mortgage can turn your home equity into tax-free cash without forcing you to move or make a monthly payment. This can be a worthwhile financial tool if used in the right situations. If not, you can end up with serious complications to your financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms, including:
- A lump sum cash payment;
- A monthly cash payment;
- A line of credit;
- Some combination of the above.

Santa Claus arrived a little late in the Downey household this year. However, his gift of low home mortgage rates is extremely generous and may continue to benefit our family for some 30 years. My wife and I are in the process of refinancing our mortgage and have just locked in to 30 year fixed loan at 4.875 percent. The rate on our original mortgage from two years ago is 6.25 percent.

My wife and I have a monthly mortgage payment of $3,200 per month and our combined income is $180,000. We each made the maximum contribution to our 401(k) accounts of $15,500. I calculated that for the past 3 years, if we had redirected our 401(k) contributions to pay down our mortgage we would have done much better. Do you think it is wise to pay off our mortgage as opposed to contribute to our 401(k) account?

Wealth management, like life, has many risk and reward opportunities. Over the Thanksgiving holiday, my wife, daughter and I piled into our car and drove to New Jersey to visit relatives. We were fortunate to hit little traffic and for much of the way I set the cruise control at 72 miles per hour. I wanted to get to New Jersey as quickly as possible, but did not want the risk of getting a speeding ticket. I felt that at 72 miles an hour, I was unlikely to get a ticket in a 65 mile per hour zone. This was the maximum speed I could drive without significant risk of being pulled over. Unlike Burt Reynolds in “Smokey and the Bandit”, my appetite for risk of receiving a ticket was pretty low and I did not want to encounter Sheriff Buford T. Justice (Jackie Gleason).

I am planning on selling my townhouse (fingers crossed) and buying a single family for $350,000. I don't quite have the 20 percent down and wanted to take a "loan" of $15,000 from my 401K to make up the difference so that I don't have to pay private mortgage insurance (PMI). Do you think that it would be cheaper to pay the PMI than to take a loan?

Lenders usually require private mortgage insurance (PMI) on home loans in which the down payment is less than 20 percent of the value of the home. The cost of PMI depends on your down payment, but ranges from approximately 0.35 percent of the value of the home (with approximately a 15 percent down payment) to approximately 0.75 percent of the value of the home (with approximately a 5 percent down payment.) PMI is tax deductible to the home owner if your household income is less than $100,000. Let’s determine your total annual cost of home ownership under each scenario and determine which one is the better option.

Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010. Knowing this, JPMorgan Chase and Bank of America have announced broad sweeping plans to help homeowners who are on the verge of foreclosure.

JPMorgan Chase plans to change the terms of $70 billion in mortgages for homeowners who are behind in their payments. The program is expected to impact approximately 400,000 homeowners or just under 5 percent of all the mortgages held by the bank.

Bank of America, under a settlement offer with 11 states, has agreed to permanently write down the amounts owed on approximately 400,000 mortgages.

So why are the banks doing this? Several believe that they can best improve the value of their loans by modifying the terms of existing loans instead of using foreclosures. That's probably not too surprising as both parties tend to lose when a house is foreclosed. The homeowner obviously loses their home, and, generally, the bank doesn't receive as much as it otherwise could for the home. Plus, the bank incurs a lot of legal fees when it follows the foreclosure route.

To learn more about the programs offered by these banks and some others, check out this New York Times article.

We are financially living on the edge. We have no savings, are in debt, and have no hope for real progress. Should we sell our house now? We live in a relatively strong market north of Boston and we are considering a move to something smaller in the ex-urbs. This would gain us a financial safety net that we don't have now. Our concern is that if we wait too much longer, this plan might not even be an option.

It is hard to answer this question without at least a little bit more information, but it seems like you are thinking along the right lines. If you can sell your current home and recognize enough of a gain to eliminate the debt and establish a reserve fund, that could be a very smart move.

At the very least, you should meet with a realtor and confirm a realistic selling price for your current home. You should also do some house shopping in the areas you are considering moving to so you can be sure that you can get a reasonable place for the amount you are hoping to spend.

Finally, you should also meet with a mortgage broker and get pre-approved for a mortgage. If you are as much on the edge as you think you are, there is a strong possibility that your credit score may prevent you from getting a good rate on your next mortgage. So, you need to go through the entire mortgage qualification process and be certain that you know where you stand.

Once you do all these things, you will have all the information you need to make an informed decision and if things go according to plan, you could find yourself with some financial breathing room which could be a huge weight off your mind. Good luck.

A startling article in the Wall Street Journal reports that nearly one out of every six homeowners in the US owe more on their home than the house is worth. One in six!

Now this doesn't mean that one in six homeowners is facing foreclosure because most can probably still afford to make their payments, but it is still shocking to think that values have fallen so quickly that one in six people owe more than their house is worth. Prices in the Boston area are now back to 2003 levels.

The article points out that only 4 percent of homeowners were underwater in 2006 and even though the 2007 number rose to 6 percent, the 2008 figure is staggeringly high at almost 16 percent. And for those people who bought their homes within the past five years, 29 percent now owe more than their homes are worth.

In other disppointing news, 9 percent of the mortgages on 1-4 family homes were a month or more overdue or in foreclosure and that is the highest percentage recorded since the Mortgage Bankers Association began tracking this figure 39 years ago.

Virtually the only piece of good news was that declines in home prices have now made homes more affordable. In the second quarter of this year, the median home price in the US was 1.9 times the average pre-tax household income and that ratio is very close to the 1.87 times income rate that was in effect for 1985 through 2000.

I am a first time home buyer. What is the best way to shop for a home loan? I have been on the job 8 years, make $117,000 per year, have excellent credit and I have 20 percent down on a mortgage of $417,000.

Great, it seems like you have definitely been doing your homework. A great place to scout out local mortagage rates is the real estate section of the Sunday Globe. There is usually a half page listing of 20 to 30 lenders with their contact information and current rates. This information is also available online.

Rates continue to drop and it looks like you might be able to get a 30 year fixed rate of 5.5 percent with no points if you shop around. If you are willing to pay a point, some lenders are offering rates as low as 5.25 percent. Some 15 year fixed rates are around 5.125 percent with no points.

You can also compare rates online using sites like Bankrate.com Unfortunately, you will probably have to do a lot of old-fashioned calling around because rates can change very quickly. You might see a great rate in the paper this morning but by the time you call the next day, another rate may be in effect.

In your case, a 30 year $417,000 mortgage fixed at 5.5 percent would have a $2,367 per month principal and interest payment. At your income level, a principal, interest, taxes and insurance (PITI) payment of $2,730 per month would be considered affordable.

Up until about a week ago, it was pretty much impossible to find a 30 year fixed mortgage rate much lower than 6.375 percent. Mortgage rates declined on Monday and Tuesday of this week and now rates in the 5's are common. Bankrate is reporting an average rate of 5.88 percent and brokers in the area are reporting some rates as low as 5.75 percent.

The government's bailout of Fannie Mae and Freddie Mac is believed to be responsible for the decline in rates although experts appear to have been caught off guard by the magnitude of the decreases. Whatever the reason, this is great news for new home buyers and people looking to refinance. The drop in rates from 6.375 percent to 5.875 percent would translate to savings of $100 per month on a $300,000 30 year fixed rate mortgage. Not a gigantic difference, but every little bit helps.

Many experts are predicting that rates could drift still lower over the coming months so it will pay to shop around and compare several lenders. When comparing lenders, don't forget that the fees charged can be just as important as the rate. Be sure to ask what kind of fees will be incurred and don't be afraid to ask for lower fees. Also, if you will be putting down less than 20 percent of the purchase price of the home, you will be required to pay Private Mortgage Insurance (PMI). If you are anywhere close to a 20 percent downpayment, stretch a little to get over the 20 percent.

Finally, remember that lending standards are still very tight so while the rates have improved, it may still be difficult for some people to qualify.

I had my home foreclosed last June.Will I be able to get another mortgage in the future?

Unfortunately, foreclosures are not an uncommon occurrence these days. For the one year period ending in May 2008, statewide foreclosures were up 140 percent. In some Massachusetts counties, the rate was up as much as 175 percent.

According to Rich Shapiro, from the Asset Mortgage Group, you will have to wait five years from the date of foreclosure to qualify for a Fannie Mae mortgage. The prohibition period for Federal Housing Administration (FHA) loans is a little more lenient -- just three years. Also, if the foreclosure was due to "documented extenuating circumstances beyond the control of the borrower" you could be considered by the FHA in less than three years. The extenuating circumstances would generally have to be something like a death or grave illness and you would need to fully document the situation for the underwriter's review.

As is the case with all mortgage loan agencies, good credit needs to be re-established. Consult with a mortgage professional about your particular circumstances -- you might find that you can get another loan sooner than you expected.

My goal is to purchase a home by the age of 50. That gives me four years. Assuming that my salary will grow slightly over the coming years, what do you think about borrowing from my 401(k) to make the down payment? I am single but I have been unable to save much every month. I make $40,000 per year and would like to buy a $200,000 home.

With a salary of $40,000, the monthly payment that you make to cover principal, interest, taxes and insurance (PITI) on your condo should not exceed $1,000. If I assume $200 in property taxes and $50 for homeowners (both pretty conservative estimates), that leaves $750 available for the principal and interest payment. If I further assume a 6 percent mortgage rate and a 30 year fixed term, you can afford a mortgage of approximately $125,000.

That means that you would need to make a down payment close to $75,000. That is a pretty large down payment. If you don't have any savings available elsewhere, and you are looking to borrow that amount from your 401(k), I would advise against doing so for several reasons.

First, there are limits on how much you can borrow from your 401(k). Generally, total outstanding loans cannot exceed the lesser of $50,000 or half of your current account balance. If half your account balance is the lower of the two amounts, a loan of up to $10,000 is possible even if $10,000 is more than half your account balance.

Second, I just hate the idea of having to borrow from a 401(k). Some points to consider:

1. Some plans do not allow you to contribute to a 401(k) while you have a loan outstanding so you would lose any employer provided match, and

2. If you were to leave your employer (voluntarily or involuntarily) the loan would be due immediately. If you failed to repay it within 30 to 60 days, it would count as a premature distribution and be subject to taxes and a penalty.

3. There is also the question of how you would pay the loan back. In my opinion, borrowing from a 401(k) should be an absolute last resort option and if you feel the need to borrow from a 401(k) to afford a house, you probably really can't afford the house.

If you have done a really, really great job of saving in your 401(k), another option might be to decrease or eliminate your contributions to your 401(k) for a very small number of years and accumulate some money that way. If you pursued this option, you would have to be diligent about resuming your contributions as soon as you bought the house. With this option, there is always the danger that you might end up using the money for other needs, and then you would have a smaller retirement account balance and no house, so it has drawbacks as well.

This is a very tough decision because buying a home is certainly an admirable goal. I would just advise you not to extend yourself too far and not to endanger your future retirement. You will certainly find people who will tell you that you can afford a much larger mortgage than $125,000, but don't believe them. Prepare your own budget and determine what seems reasonable for you and your personal circumstances.