Reverse Mortgage an Option for Seniors

   

Posted: Oct 14, 2009

The recession has forced many Americans to find new ways to deal with their personal finances. For one segment of the population, reverse mortgages can spell relief from financial stress.

A reverse mortgage allows older homeowners to receive regular infusions of money based on the equity they have in their homes. Unlike a home equity loan or a home equity line of credit, reverse mortgages don't require consumers to pay off a monthly bill. Furthermore, according to the U.S. Department of Housing and Urban Development, reverse mortgages don't take into account a person's income, which can't be said of the majority of home equity loans.

There are a few requirements. First of all, most reverse mortgages require that the homeowner be at least 62 years old. In fact, the Federal Housing Authority makes that age requirement mandatory to qualify for a reverse mortgage through its Home Equity Conversion Mortgage program.

According to the American Association of Retired Persons (AARP), the money granted through a reverse mortgage may be paid in a number of ways. Homeowners may choose to receive it as a lump sum or as a monthly payment. The reverse mortgage can also be treated as a kind of consumer line of credit,  with the borrower choosing how much they want to withdraw at a time.

The AARP also notes that the amount a person qualifies for depends on their age and the value of their home. The older they are, or the more their home is worth, the greater the amount available to them through a reverse mortgage.

Of course, there are a few catches with reverse mortgages. First of all, they require that the borrower use the home as their primary residence. Furthermore, the money is not free - it is still a kind of loan. 

Perhaps most importantly, once the person no longer lives in the property - whether through death, relocation or the sale of the property - the lender will collect on their investment. This can come in a number of forms, including repayment of the loan by the homeowner or repossession of the home by the lender. If the borrower has died, their heirs may be responsible for paying off the loan.

Lenders may also expect payment if a number of other factors occur during the life of the loan. For example, AARP notes that loan defaults may occur if the borrower does not pay their property taxes, keep their home in good repair or maintain their homeowner's insurance.

Reverse mortgages appear to be growing in popularity. According to the National Consumer Law Center (NCLC), the annual number of reverse mortgages is more than 110,000, with a combined total value of $17 billion. With their popularity, however, comes the increased chance that scammers try to take advantage of seniors.

U.S. Senator Claire McCaskill of Missouri recently joined the NCLC in calling for further regulation of the reverse mortgage industry. Along with taking advantage of seniors, some reverse mortgages are being sold as securities, which they say could put the whole economy at risk.

"Abuses in the subprime lending market almost brought down our economy," McCaskill said. "Now we’re seeing similar abuses with reverse mortgage lending. Something needs to be done before more lifesavings are depleted and more tax dollars are drained."