Searching for the Best Reverse Mortgage

Reverse mortgages have slowly been gaining acceptance among older homeowners as an alternative source of cash.

But these financial instruments that allow homeowners who are "house rich but cash poor" to tap into the equity in their homes are very complicated transactions and should not be entered into lightly.

"What you don't know can hurt you," says Ken Scholen, director of the nonprofit National Center for Home Equity Conversion (NCHEC). Scholen is a leading expert and proponent of reverse mortgages, but he believes consumers need better information and ways to compare different reverse mortgage products.

Review All Options

"Seeing all your options is critically important because no single reverse mortgage works best for everyone," says Scholen.

For example, he notes that a 75-year-old living in a $150,000 home in Sugar Grove, Ill., could get about $75,000 from one reverse mortgage plan but less than $45,000 from another -- a difference of $30,000. But for a different consumer, the other plan might be a much better deal.

The amount you can borrow through a reverse mortgage depends on your age, home value and location, and current interest rates. Reverse mortgages are particularly attractive to older people living on fixed incomes because there are no income requirements to qualify for the loan as there are with a home equity loan or traditional mortgage.

About 45,000 reverse mortgages have been approved around the country, most of them in the past five years.

How They Work

Generally, reverse mortgage borrowers must be at least 62 years old and either own their homes outright or only have a small mortgage balance. The older the homeowner, the more money he or she can borrow.

With a traditional mortgage or loan, you pay the lender every month. A reverse mortgage works just the opposite -- the lender pays you, hence the name. Borrowers can chose to receive payments on a monthly basis, in a lump sum or as a line of credit.

The money you receive from a reverse mortgage is tax free, but it can affect government benefits such as Supplemental Security Income designed for low-income individuals.

No repayments are required while the borrower lives in the home. Lenders recover their loans plus interest and fees from the sale of the home when the owner move out or dies.

Because no monthly payments are required from the homeowners, the debt grows bigger over time while the homeowner's equity shrinks, leaving little if anything for that person's heirs. In some cases, the lender may demand a share of the home's appreciation over the course of the loan, which can substantially increase costs to the borrower.

Reverse mortgages tend to be very expensive in the early years, but if you live long enough, you may get the last laugh. The lender cannot come after your estate if the reverse mortgage payment surpasses the value of your home. In other words, you can never owe more than the home is worth.

Some reverse mortgage programs limit the amount you can borrow. Fannie Mae's "HomeKeeper" reverse mortgage and the federally insured Home Equity Conversion Mortgage (HECM) available through the Department of Housing and Urban Development have borrowing limits of $214,000. If you need to borrow more than that, you'll need to work with a private lender.