Reverse mortgages: Are they for you?
For seniors with little cash and lots of value socked away in their home, the reverse mortgage is rapidly gaining popularity as a way to raise money without having to move.
From July 2005 through March of this year, the federal government insured 48,088 reverse mortgages, up more than 20,000 from the previous year. And in May alone, a record 8,414 reverse mortgages were approved.
Essentially, seniors are borrowing against the value of their homes without needing to pay the money back until they move out or die. Despite the growing number of reverse mortgages, however, they are "not necessarily the most desirable option for most older households," says Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School. "This always will be a niche product."
Who fits the reverse-mortgage profile? First, there's an age limitation. Under the Federal Housing Administration program, only people older than 62 can get a reverse mortgage. Eligible homeowners should also be low on cash, unable to take money out of retirement funds, and having trouble paying for basic expenses, says William Supper, a financial planner in Morristown, N.J.
If you take out a reverse mortgage, you borrow money and pay interest just as in a regular mortgage. As the homeowner, you continue to hold title to the property. If you move out, you must sell the house. You get any remaining proceeds from the sale price minus the amount you borrowed; if you die and your estate sells the property, your heirs get any remaining proceeds.
The bottom line: You'll be able to continue living in the house while reaping the benefits of immediate access to cash. You can get the money through a variety of means, such as a credit line or a lump sum.
There are downsides. Expenses are often high–as with any mortgage, there are closing costs, and you typically must pay for mortgage insurance. The amount you can borrow is limited by your age and the value of the house. And a reverse mortgage makes no sense if you plan to move within a few years.
On the bright side, recent reforms have made reverse mortgages less risky than in years past, when fraud was more common. "When the government is involved as a guarantor, borrowers at least know they won't be taken advantage of," says Jack Guttentag, an emeritus professor of finance at Wharton.
Wachter says she expects reverse mortgages to grow in popularity as the population ages. "For those who are cash poor on a regular basis and perhaps have no heirs and want to remain in their community," she says, "there couldn't be a better instrument."
But she advises homeowners to make sure they get plenty of guidance. "These deals are extremely complicated, and even experts find they don't necessarily understand all the details," Wachter says. "It's always good to seek advice on these once-in-a-lifetime transactions."
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