The recent sluggish economy has wreaked havoc on the lives of many Americans of varying races, ages, and financial backgrounds. Senior citizens, in particular, have suffered due to losses in the stock market over the past few years. Steep drops in interest rates have decreased their share certificate/CD (certificate of deposit) and money market investment earnings considerably. With many of their incomes also depleted by rising out-of-pocket expenses for prescription drugs, medical care, and supplemental insurance premiums, older Americans are looking to alternative means to cover living expenses.
One option to gain recent awareness is reverse mortgages. Reverse mortgages emerged in the 1950s as proprietary products, different from the products available today. Today, reverse mortgages are loans available to homeowners 62 years of age or older who borrow against the equity in their homes. Borrowers can use loan proceeds for any purpose, including but not limited to supplemental income, home repairs, education, and travel.
Many misconceptions about reverse mortgages help explain why they didn't catch on as a financial planning tool until recently. Some people mistakenly assume the lender takes possession of the home--or the lender sells the home--once a reverse mortgage comes due. Neither assumption is true.
According to Just the FAQs: Answers to Common Questions about Reverse Mortgages, a free consumer booklet from the National Reverse Mortgage Lenders Association (NRMLA), a reverse mortgage allows you to continue to live in your house as well as retain the title throughout the life of the reverse mortgage. Repayment of the loan only begins once you permanently move out of the home or pass it to your estate.
"The loan repayment amount can never exceed the value of the home," says Glenn Petherick, director of communications for the NRMLA. "When the loan must be repaid, the borrowers (or their heirs or estate) decide whether to sell the home and pay off the reverse mortgage, or to keep the home and pay off the reverse mortgage using some other source of funds."
The versatility of reverse mortgages, combined with the lowest mortgage rates most consumers have seen in their lifetimes, demonstrates reverse mortgages' increased popularity since 2001. Older homeowners now are looking to reverse mortgages for the variety of advantages available.
There are three reverse mortgage products:
One advantage of reverse mortgages is you decide how to receive the money. Payment options include:
According to the NRMLA, more than 13,000 homeowners took out reverse mortgages in 2002--a 68% increase from 2001. "Reverse mortgages are being taken out by a variety of seniors from a wide range of incomes, and for many different purposes," says Petherick. "The typical borrower today is a widow in her mid-70s, but the average age this year has been getting lower. Certainly it makes sense for a person who is on a modest or tight-fixed income, such as someone whose spouse has died. But there are also people who are more well-off who get a reverse mortgage to buy a new car, a camper, or to travel."
Eligibility for a reverse mortgage depends on two factors: age and home ownership. No income requirements exist, and credit and medical histories are not considered.
While some credit unions, banks, and state and local housing agencies offer reverse mortgages, consumers usually acquire them through mortgage banking companies. Before taking out a reverse mortgage, Petherick says to keep in mind the following:
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