Reverse Home Mortgage: Risks vs. Rewards

There is an increasing trend among senior citizens in need of money for their rising health care and prescription drug costs — taking out a reverse mortgage or in essence, getting paid by their home. According to the National Reverse Mortgage Lenders Association, the number of reverse mortgages insured by the U.S. Department of Housing and Urban Development (representing 90 percent of all such loans) has surged from 157 in 1990 to more than 107,558 in 2007, with a forecast of more than 200,000 this year. The reason? More than 12.5 million seniors over the age of 65 own their homes free and clear, and are sitting on more than $4 trillion in home equity — money which many need to put toward their daily living and medical expenses.

Related

Do You Have Money Problems?

Mellody, can you help us understand how a reverse mortgage works? How is it different from a traditional mortgage or home equity loan?

A reverse mortgage is exactly what it sounds like — it is the opposite of a traditional mortgage. With a traditional mortgage, you borrow money from a bank to purchase a home and then repay this loan with interest over time. A home equity loan is similar, except you are borrowing against the equity you have built up in your home and repaying that amount with interest over a specific period of time. When applying for both a mortgage and a home equity loan, there are income thresholds to ensure that you can repay whatever you are borrowing.

Conversely, with a reverse mortgage, there are no income requirements, and the lender essentially pays you to live in your home. Specifically, the equity you have built up in your home can be paid back to you in one of the following ways: a single lump sum of cash; a regular payout as long as you live in the home; a credit line to be accessed when you need it; or a combination of these options. And, you do not have to repay any of this money until the last borrower dies, sells the home or moves away permanently. The money you receive from a reverse mortgage can be used for anything, including daily living expenses, medical bills, prescription costs and even home repairs.