Putting Your Mortgage in Reverse

Have you heard about reverse mortgages? They’ve been in the media a lot lately, but they’re not really new; they’ve been around since the ‘60s. A reverse mortgage is a special type of home loan that allows homeowners (usually seniors citizens) to convert a portion of their home’s equity into cash.

A recent sharp increase in numbers has brought reverse mortgages into the public eye. In 2000 there were 6,600 reverse mortgages issued. According to the Department of Housing and Urban Development, the number of federally insured reverse mortgages grew to over 115,000 in 2008.

That may sound like a lot, but keep in mind, reverse mortgages still make up a very small portion of the overall mortgage market. Estimates have the number of regular mortgages at 10.7 million in 2007. Reverse mortgages represented only about seven-tenths of one percent of that total.

Reverse mortgages are available to those aged 62 and older who own and live in the home as a principle resident. The amount available to the borrower depends on age, with 55 percent of the dwelling’s value available at age 62 and approximately 85 percent at age 95.

Funds can be received in one of three ways: a monthly payment, a lump sum, or as a line of credit to draw on as needed. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower is no longer using the home as a primary residence.

The borrower makes no payments while living in the house, but the loan must be repaid in full (plus interest) when the last living borrower passes away, sells the home or moves away. Proceeds from the home’s sale go to repayment of the mortgage, with anything left over going to the borrower or the borrower’s estate.

Why do people take out reverse mortgages? Some seniors with small retirement nest eggs use them to acquire cash to help supplement their Social Security. It’s an attractive alternative because they do not have to repay the loan as long as they remain in the house. Others use them to finance an active retirement or home improvements.

Is a reverse mortgage for you?
There are a number of things to consider when contemplating the use of a reverse mortgage:

• Age. The older you are, the better the chance that you could benefit from a reverse mortgage as you’d usually have more equity built in. Institutions figure the payouts based on age and life expectancy, in addition to the home’s value.
   
• Circumstances. If you’re planning to move soon, a reverse mortgage is probably not your best choice.
   
• Fees. Those associated with reverse mortgages are high. Closing costs are significantly higher than for traditional mortgages. Fees are paid when the home is sold and typically average about 5 percent of the home’s value.
   
• Programs. Be sure to check for available aid. You may qualify for benefit programs on a state or federal level.
   
• Heirs. Are you planning to leave your home to heirs as an inheritance? A reverse mortgage will reduce the value of your home when repayment is due.

Make an informed decision
Before considering a reverse mortgage, do your homework. Read material concerning the subject. By law, you are required to seek independent financial counseling before finalizing any reverse mortgage deal. Be sure to ask enough questions so that you feel comfortable making any decisions.

Many experts recommend a reverse mortgage only as a last resort. Before you give them serious thought, consider the alternatives of a home equity loan or decreasing costs by downsizing your home to a smaller home or apartment. For additional information about reverse mortgages, visit www.aarp.org/money/revmort/.

_{Information for this article was obtained from aarp.org, Bankrate.com and hud.gov.}