Talk about back from the dead. About 15 years ago, so-called reverse mortgages - which let senior citizens pull out equity from their homes to supplement retirement income - were just about buried in bad press. Too many bad products and bad deals gave them a terrible rep, said Casey Fleming, a mortgage advisor in Northern California.
But that was then. Now there's a shift. “Reverse mortgages are becoming more popular, as Baby Boomers retire," said Jamie Hopkins, a professor of retirement at the American University of Financial Services in Bryn Mawr, Pa. "In the next two to three years you will see a tremendous amount more. A lot of our wealth is built into home equity. This will be a saving grace for a lot of Baby Boomers.”
Both experts are right, but many things have happened that effectively have put reverse mortgages on the financial planning agenda for some Baby Boomers. The main thing is: Boomers may need the money. Many are coming up woefully short when it comes to retirement savings and investments. But many have substantial equity in a home. They do not want to sell that home in many cases. Enter the reverse mortgage, which lets them pull out money to augment their other sources of retirement income. It is a loan that does not involve repayment, except out of the home’s equity -- which happens only when the senior dies or moves out of the house (into assisted living, for example).
Reverse mortgages also can be structured as a lump sum payout up front or - what experts said is an increasingly popular option - as a home equity line of credit, drawn on as needed.
Understand: a generation ago, some seniors lost their homes in reverse mortgage deals gone bad. In other cases, after their death, heirs were dunned to make up losses on the home. Thus the bad rep - very well deserved.
But that cannot happen now, said Hopkins, who elaborated that new rules issued by the federal government provide many protections for seniors who use a so-called HECM, a home equity conversion mortgage, available only through FHA approved lenders. Among the key changes: the FHA insures the loan, said Hopkins. “It’s a non-recourse loan," he said. "If money is owed at death it’s covered by the FHA insurance.”
Hopkins pointed to two more key changes: