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.
The bottom line: These are complex loans in which your debt rises as time goes by -- the opposite of a typical loan. As a result, HUD requires that HECM applicants receive counseling from an approved provider.
In 2007, AARP determined that a 74-year-old with an HECM for $181,000 on a $300,000 home could pay more than $30,000 in fees over 12 years. That figure should be lower under the new laws, but critics say it's still more expensive than a conventional mortgage.
Reverse mortgages also can eat up your home equity fast: Borrowing $150,000 at 6% means losing $272,000 of home equity over 10 years. And they can impact your ability to qualify for federal entitlement programs such as Medicaid.
Otherwise, homeowners age 70 or older who have dwindling assets or medical/long-term care costs beyond their means are the best candidates for reverse mortgages. Because most fees are front-loaded, and paid with loan proceeds, these loans also may make sense for people planning to stay in their home for several years.