The Straight Story on Reverse Mortgages

Once relatively rare and even less understood, reverse mortgages are now becoming almost routine, and for good reasons. After spending a good chunk of a lifetime paying off a mortgage, more homeowners are finding a reverse mortgage provides cash for things they need in the golden years. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements, or provide other needs in retirement. Of course, since your home is possibly your largest single source of financial security, it's smart to know more about reverse mortgages before calling the lender.

Simply put, a reverse mortgage is a special type of home loan that lets a homeowner convert home equity into cash. In order to qualify, you must: be 62 years or older; own your home free and clear or owe just a small amount; and use your home as a primary residence. The maximum amount usually depends on your age, the current interest rate, and your home's value. The equity built up over years of home mortgage payments can be paid to the homeowner: in a lump sum, in a stream of payments, or as a supplement to Social Security or other retirement funds. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrowers no longer use the home as their principal residence.

Unlike a traditional second mortgage or a home equity line of credit, you do not have to demonstrate sufficient income to qualify for the loan, and you do not make monthly mortgage payments. A reverse mortgage works, you guessed it, in reverse. It actually pays you, and is available regardless of your current income. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional costs such as utilities, and you must maintain your home in good condition. The maximum you'll qualify for will probably be 50 to 75 percent of your home's market value. And the loan proceeds are tax-free.

When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other finance charges, to the lender. All proceeds beyond what you owe belong to you or your estate. This means the remaining equity in your home can be passed on to your heirs. This does not mean you or your heirs have to sell your home to pay off the loan, you could, for example, take out a second mortgage. Be sure to ascertain the exact terms of payoff from your lender. None of your other assets should be affected and no debt passed along to your estate or heirs.

Seniors are targets for opportunists wanting to get some of that wealth. Be sure you know what you're getting into, and don't buy into pressure sales or fast talk, not from a mortgage broker, not even from friends or relatives. Beware of firms that offer to provide the name of a lender for a "small percentage" of the loan. Generally speaking, stay away from using an estate planning service, or any service that charges a fee just for referring you to a lender. Make sure that payments are made out directly to you--don't sign the money over to anyone else. Remember that it's totally up to you how you spend the money. Just because you heard about a reverse mortgage program from a remodeling company or someone trying to sell investment products, doesn't mean you have to purchase their services.

Sources used to create this article include Fannie Mae and U.S. Department of Urban Development.

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