What You Need to Know About Reverse Mortgages

It's a simple fact: As our population lives longer, many of us find ourselves outliving our savings accounts. Pensions and social security often don't keep up with inflation, and then there are the kids who need help, the new roof, the prescriptions not covered by medical insurance, and all those other expenses that keep coming long after a regular paycheck has stopped fattening the savings account every month. As one of my friends puts it, "There's nothing worse than being old, except being old and being broke."

Many seniors make daily sacrifices to live within a limited budget while sitting on a large amount of equity in their home. For the right situation, a reverse mortgage, also known as a home equity conversion mortgage (HECM), is a safe way to tap into that equity and supplement a monthly budget.

A reverse mortgage is a loan that lets you convert part of the equity you have in your home into income. This is similar to a standard mortgage, but with a reverse mortgage you don't need an income to qualify and there are no monthly loan payments. Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, maintenance, and other expenses. When you sell your home or no longer use it for your primary residence, you or your estate repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

Before I made an effort to research this new hot topic, what I didn't know about reverse mortgages could have filled an encyclopedia, and I call myself a mortgage banker. After my research, I went from thinking of RMs as a last-resort loan for desperate borrowers to seeing them as a helpful financial tool. I even recommended a reverse mortgage to one of my dear friends. For the right person, a reverse mortgage can be a life-changing godsend. But don't jump in without doing your research. As with any major financial decision, it is important to learn all the facts before signing on the dotted line.