Consider a Reverse Mortgage, But Only as a Last Resort

Q: My husband and I are in our mid-70s and have a modest fixed income from Social Security and pension plans. We own our house free and clear. While we are still in good health, we would like to see as much of the world as possible. Several friends have suggested that we get a reverse mortgage. Can you explain how this works and whether it is something we should consider?

AReverse mortgages have become popular in recent years as many baby boomers have entered retirement without a lot of money saved. But you should explore other options first and take out a reverse mortgage only as your last resort.

Here's how a reverse mortgage works: If you are 62 or older and own a house that is paid off or has a relatively low mortgage balance, you can qualify. Unlike with a regular mortgage, on which you have to make monthly mortgage payments, with a reverse mortgage you can borrow money but do not have to repay the loan until you either sell the property or die.

At that point, the lender is repaid the principal and all the accrued interest. The lender cannot foreclose on the property or in any way interfere with ownership unless the owner is causing waste or damage.

Some loan documents also require that if you are out of the house for a period of time -- typically six months or one year -- the loan has to be repaid.

There are three ways you can take money from a reverse mortgage: a lump sum of cash; a monthly cash payment; or a line of credit, so that the money is available when it's needed.

There are a number of reverse-mortgage programs available. Perhaps the most popular is the home-equity conversion mortgage, which is insured by the Federal Housing Administration.

To be eligible for the HECM, all of the owners of a home must be at least 62, must use the home as their principal residence and cannot be delinquent on any debt to the Internal Revenue Service. The home must be either a single-family residence or a one- to four-unit building. Some condominium units that have received government approval are also eligible. Cooperative apartments and most mobile homes are not eligible.

How much money can homeowners take out? That depends on a number of factors, including Zip code, age and the appraised value of the property. There's a handy calculator at http://www.rmaarp.com, a site run by AARP.

Another program available to homeowners is the Home Keeper, sponsored by Fannie Mae. There are some differences between this and a HECM. For example, if a borrower opts to take the money as a line of credit, the unused portion of that line can increase over time with the HECM but will remain fixed with the Home Keeper.

Both these programs have loan limits. If a homeowner wants more money, there are lenders who will make those larger loans, too. The National Reverse Mortgage Lenders Association has a Web site, http://www.reversemortgage.org, that has contact information for lenders active in each state. That site also has a lot of other information about these mortgages. AARP's reverse-mortgage site can also help you find lenders, though it will not endorse any.

That's a lot of information to review, but only you can decide whether you want a reverse mortgage. Recently, a lawyer friend suggested to me that "next to subprime mortgages, the next mortgage problem for older homeowners will be in the area of reverse mortgages."