The Reverse Mortgage, Revisited

Attention strapped seniors: The reverse mortgage, a financial instrument that acts as a lifeline for some financially struggling retirees, has become a bit more accommodating under Obama’s stimulus plan.  An HECM, or home equity conversion mortgage, (the most popular reverse mortgage and only one issued by Uncle Sam) now carries a loan limit of $625,500, up from $417,000. This has more seniors looking into a reverse mortgage, especially as other types of home loan products become harder to attain.

A Reverse Refresher
A traditional reverse mortgage is basically a loan against the value of your home that doesn't have to be paid back until you sell the property, move out or pass away.  A bank issues you credit, based on the value of your home, your age and current interest rates.  For example, according to an AARP chart, if your home is worth $150,000, your age is 65 and the rate on the loan is 6%, your reverse mortgage loan amount should be roughly $74,000, or half the value of your home.  Generally, the older you are, the more credit you can receive because you’ll likely be able to pay back the loan faster.

You can choose to receive the loan in a single lump sum, a credit line or fixed monthly payments. The debt you inherit is equal to the loan advance plus interest.  

Qualifications
To be eligible you must own your home and be 62 or older. You also cannot be behind on any federal debt.  The financial qualifications for a reverse mortgage are more lenient than a traditional home loan. Because you don’t owe money every month, like a normal mortgage (also known as a “forward” mortgage), banks won’t disqualify you if you don’t have savings or have no income.

Some Risks
Assuming your home value doesn’t skyrocket (and at this point I think that’s a safe assumption) your debt increases and your home equity decreases by taking on a reverse mortgage. This is the opposite of how a forward mortgage should work (in theory).  One of the biggest risks is that if you take on a reverse mortgage accumulating interest for a long period of time, or if the value of your home falls, there may be hardly any equity left in your house.  If that’s the case, you only have to pay the bank the value of the home.  So, betting you are able to sell the house at market value, this will work in your favor.