First Person: Understanding the Reverse Mortgage

After a lifetime of hard work and saving, many older Americans now own their homes outright, with no mortgage. The reverse mortgage is a relatively new product that purports to allow these homeowners to get cash against their house, which then reverts to the lender upon their death.

We've all seen the TV commercials for reverse mortgages. Familiar older actors urge how great it would be to get a reverse mortgage. Robert Wagner, Henry Winkler and James Garner offer the most compelling reasons why you, a cash-strapped homeowner aged 62 and above, should take that financial step.

The commercials promote a reverse mortgage will provide enough income to allow you to enjoy old age with no financial worries. That could be true under the right circumstances, but a reverse mortgage is not always a simple solution and is not right for everyone.

What actually is a reverse mortgage?
It's a loan that permits you to give up part or all of your home ownership in exchange for cash. You must be aged 62 or older, and the lenders will determine just how much your home is worth before granting the cash.

What's good about reverse mortgages?
The primary benefit of giving up some or all of your home ownership is that you may remain there for the rest of your life. It can be ideal for a retiree who has very limited income, and needs monthly cash to pay taxes, bills and everyday expenses.

The income you receive by a reverse mortgage is usually tax-free. Further, it isn't necessary to be in urgent need for the money. It could be used for vacations, a new car or gifts for family.

What isn't so good about reverse mortgages?
The loan company isn't giving you that money out of generosity. It's gambling on you to die within a relatively short time, so it'll own the home to sell at a profit.

Possibly the most negative aspect of taking a reverse mortgage is that you can't leave the home to a family member or anyone else. This can be a major concern when you own a valuable home, a condominium or other attractive property. The loan company will take over, and unless your heirs attempt to buy it on the open real estate market, they won't get it.

What should you do about it now?
Before you sign for a reverse mortgage, consider all aspects of it, both positive and negative. Speak with a trusted banker and/or financial adviser about why your financial situation may make the loan necessary. The Federal Trade Commission has an excellent information page here.

While considering a reverse mortgage, sit down with concerned family members and discuss all aspects of it. If you have no family members nor others you'd want to inherit your home, and you're in financial trouble, that could make the decision fairly simple.