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A 60-second guide to reverse mortgages

[Jun 1, 2011.]


If you're over 62, a reverse mortgage could allow you to convert some of your home equity into cash. Sounds like a good deal, right? Well, it can be for some folks, but for others a reverse mortgage is a bad idea. Here are some things to consider before using your home as a piggy bank to fund retirement.

No monthly mortgage payments

With a traditional amortizing mortgage, such as a 30-year fixed-rate loan, you make payments each month to pay down the principal and interest. Reverse mortgages don't require monthly payments. Rather, the mortgage lender pays you cash in the form of a lump sum, installments, a line of credit or some combination of the above. Reverse mortgage proceeds can be used for pretty much any purpose, such as health expenses, home repairs or downsizing to another home as long as it will be your principal residence.

Your home value

To get a reverse mortgage you'll need a property appraisal. The appraisal is part of the equation that determines how much money can be borrowed. Other factors are your current age and mortgage rates. If you are borrowing money with a spouse, the age of the youngest person is used to determine how large a reverse mortgage you'll get. You may be able to qualify for a reverse loan even if you are still paying off a regular mortgage. However, being underwater on a mortgage loan means you won't have any home equity to tap.

Can you afford retirement?

Reverse mortgages appeal to many seniors because they are looking for a way remain in their homes as long as possible. Many older Americans have found themselves living on fixed incomes that don't stretch far enough. Others have resorted to going back into the workforce, sometimes full-time. If you aren't sure where the funds will come from to pay for your retirement lifestyle, look for a professional who can help sort that out.

Reverse mortgage counseling

If you are interested in reverse loans, a counselor can help walk you through the process. The Home Equity Conversion Mortgage (HECM) program requires borrowers to get help from a counselor approved by the Department of Housing and Urban Development (HUD). The counseling session can be done in person or over the phone. Depending upon your financial situation you also may need to consult with an estate planner. The decision to get a reverse mortgage is a biggie, so take the time to learn about the good and the bad with borrowing money this way.


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