Reverse Mortgages: The Basics
How it works: Also known as a lifetime mortgage, a reverse mortgage is a home loan that allows people age 62 or older to convert some of the equity in their homes into cash. Through a reverse mortgage, a portion of the equity in the property is released as one lump sum or multiple payments, and the homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves.
Who's eligible: To qualify for a reverse mortgage, a homeowner must be 62 and have home equity, and the home must meet minimum property standards set by the U.S. Department of Housing and Urban Development (HUD). As long as there is equity in the home, eligibility is not dependent on a borrower's credit rating.
Why? You can use the equity in your home without having to sell the property. With a reverse mortgage, you can stay in your home as long as you're able and increase your cash flow for living expenses.
Why not? Having a reverse mortgage doesn't mean you're without risk of foreclosure. Currently, between 10,000 and 20,000 reverse mortgage loans are in foreclosure, according to the National Reverse Mortgage Lenders Association. Often, this happens when home insurance or property taxes increase, and borrowers on limited incomes can't keep up with payments.
2012 changes: Congress voted in December 2011 to increase fees on mortgage loans insured by the Federal Housing Administration (FHA). This fee increase will appear as a 0.1 percent increase in the mortgage insurance premiums (MIPs) paid by borrowers. In addition, Housing and Urban Development has said it will release a new financial assessment that will govern how lenders must assess future borrowers sometime in 2012. The new guidelines are expected to be stricter and may make it more difficult for some seniors to obtain a reverse mortgage.
The fine print: Due to steep upfront costs, a reverse mortgage is generally seen among financial advisers as a loan of last resort. If the approved amount of the loan runs out while you're still living in the house, you won't receive any more cash and the loan could be called. If your house doesn't sell for enough money to cover the loan amount, you could be left without a down payment for a smaller home or the money to get into a retirement center.
Tools: Try these:
New Turmoil in the Reverse Mortgage Market
Turning up the Heat on the Reverse Mortgage Industry
Income, Reverse Mortgages and Social Security