When faced with dwindling savings and mounting debt, elderly homeowners often consider a reverse mortgage for a cash infusion or to wipe out a monthly home mortgage payment. These days, some seniors also are using them to help stave off home foreclosure.
A reverse mortgage is essentially a loan that lets seniors 62 or older convert home equity into cash. They don't have to repay the loan as long as they stay in their home. Interest payments and fees are most often paid when the home is sold or the homeowner dies.
Helen Yomine, an 86-year-old widow in Lake Forest, Ill., recently applied for a reverse mortgage because her home, valued at $410,000, was about to go into foreclosure. Her reverse mortgage paid off her home mortgage and taxes she owed, leaving her with no monthly payments.
She still owns the home but will have to repay the loan, closing costs and interest when she sells it. If she stays in the home until she dies, the reverse-mortgage lender will be repaid when the house is sold.
"It's a scary time when you're alone and don't have anyone to lean on," she says. "But the reverse mortgage will give me comfort and the ability to stay in my home until I die."
That doesn't mean a reverse mortgage is right for everyone. They can be costly and complicated in multiple ways.
Aggressive marketers often take advantage of vulnerable homeowners, who can end up paying more than they should for a product that doesn't work for them, says Sen. Claire McCaskill, D-Mo. She sponsored a bill to help protect seniors from predatory reverse-mortgage lending. It became law in July.
But during an economic crisis, reverse mortgages grow in popularity.
Before rushing into a reverse mortgage, it's important to educate yourself and learn about recent changes in the federal program that's officially called the Home Equity Conversion Mortgage Program. It is run by the Federal Housing Administration and insured by the federal government.
Among recent changes:
This year, the maximum reverse-mortgage amount was raised from $417,000 to $625,500. The loan change was tied to the economic stimulus package, so it is only scheduled to last until year's end. It is not clear if it will be extended.
For now, this allows more elderly families to borrow enough money from a reverse mortgage to save their home from foreclosure.
"Our hope was that by raising the limit, more homeowners facing foreclosure and living in higher-valued homes might be able to take out a reverse mortgage and keep their homes," says Bronwyn Belling, director of the Reverse Mortgage Education Project for the AARP Foundation.
But even if you rush to get a reverse mortgage this year, you may not get the maximum loan amount. That's because your loan amount is based on several factors that include the home's value and your age.
You must pay a one-time fee for the paperwork and processing of your loan. But last year, the government reduced such origination fees.
Before the change, homeowners paid a 2% fee on the loans. Now they pay 2% on the first $200,000 and 1% on any amount over that, with the fee capped at $6,000.
That's good news, but keep in mind that origination fees are only a small part of the expenses. "The costs are still pretty staggering for someone who hasn't looked at it closely," Belling says.