Reverse Mortgages Get More Attractive

For seniors, the idea of a reverse mortgage seems appealing: Turn your home equity into a steady stream of income, and stay in your home as you age.

Especially given the stock market's free fall and the onerous mortgages some folks are looking to escape, these loans may sound better than ever.

What's more, HUD last month instituted new rules for Home Equity Conversion Mortgages, or HECMs, the federally insured loans that make up virtually all reverse mortgages. The new law may make reverse mortgages more attractive by raising the limit on qualifying home values, capping origination fees and, starting in 2009, allowing seniors to use a reverse mortgage to buy a new home in a single closing.

Still, these loans remain expensive, and can be risky. Here's what you need to know:

Reverse mortgages 101: Reverse mortgages allow homeowners age 62 or older to borrow money based on their home equity, with the principal and interest repaid when they die or move out for a year or more. Cash is available in a lump sum, monthly payments, a line of credit (which typically grows 5% to 5.5% annually) or a combination. These loans are available from major financial institutions, including Wells Fargo, Bank of America (which acquired Countrywide), M&T Bank, MetLife and Genworth.

When the loan comes due, the senior (or his or her heirs) can sell the home or buy the equity back. The good news: If the house is worth less than the total amount due, they pay only the value of the home.