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Reverse Mortgages

After spending their working lives paying towards a 30-year mortgage, the fact that so many seniors struggle to make ends meet is disheartening.

An increasingly popular solution, reverse mortgages allow seniors age 62 and older to cash in on the equity of their home, pay off bills and boost retirement income, all the while staying in their home.

With a reverse mortgage, principal and interest aren't due until the homeowner dies or moves out.

"When you've got somebody that is equity rich and cash poor, a reverse mortgage gives them the chance to basically get paid back that equity they've spent so long paying into," says Hometown Mortgage loan officer Brian Mathweg.

"Regardless of all the hype about people losing their homes, there are some significant safeguards in place to protect the borrower. It's very regulated."

While credit and income do not affect an application for a reverse mortgage, applicants must occupy the home as their primary residence, own a significant percentage of the home's value and complete special financial counseling by a third party, says Mathweg.

Other requirements include carrying mortgage insurance and paying for taxes and maintenance. Options for payment to the homeowners include a monthly payment, a lump sum or combination of the two.

"They're basically a no-risk loan. Obviously if they're not making a payment, there's no risk of default," says Complete Mortgage Solutions loan officer Keith Guy.

An additional "no risk" feature, according to Guy, is homeowners cannot be made to repay more than the home's value at the time the loan is closed, meaning, "if the house is not worth what is owed on it, the bank takes it as a loss. They don't go after the heirs."

"The thing I love about them is, in our society, I don't think people are doing enough saving and planning for retirement," Guy says.

"When they finally retire on half the income they're working for, they have the option to take and displace a mortgage payment to free up some of their monthly finances."

On the downside, younger retirees who need a short-term increase in monthly income, plan to move in three to five years or want some quick cash to make a large purchase, such as an RV, would be better served by a home equity credit line or other financial product.

"A reverse mortgage is a good idea if the homeowner is in the last house they plan to live in," Guy points out.

Cons to popular reverse mortgages, Valley Financial Group, Inc. mortgage broker Bunny Ross points out, include higher financing costs, adjustable rates far exceeding fixed-rate mortgages, eligibility issues for needs-based senior services and, even if payments stop, growing interest on the loan on the home if not paid down.

"With the right lender, the right borrower and the right circumstances, reverse mortgages are very, very beneficial products that can do considerable good," says Ross, "but they are also high cost, adjustable rate loans that are not for everyone... regardless of the hype you could still lose your home."

Other factors to consider are that homeowners surrender rights to the home if taxes and homeowners' insurance are not paid or if the homeowner ceases to live in the property without permission from the lender.

However, if a homeowner is in his or her upper 60s or older, need to supplement their income and own their own home, a reverse mortgage can mean drastic lifestyle improvement.

It's an amazing loan product for some seniors, who need to supplement their income and wind up with no house payment," says Wells Fargo reverse mortgage consultant Gary Christensen.

"As everything becomes more expensive, it becomes a struggle to make ends meet with pharmacy costs, price of fuel... I've had seniors come in with property taxes delinquent, worried they'd lose their home, huge credit card bills... and I've seen this just change people's lives."

For the right person, in the right time of his or her life, a reverse mortgage may be the answer to all their problems. But the smart thing to do is to talk to a lot of lenders, ask friends and relatives who have taken out a reverse mortgage what they think of the process and always take your time. Also, read all the small print and don't be afraid to ask questions.

Reverse Mortgages