Reverse Mortgage Pros and Cons

While the recent economic downturn has left few unaffected older Americans who were counting on their now diminished net eggs have been hit the hardest. According to Time, to supplement their stash, an increasing number of seniors are turning to reverse mortgages, which function essentially as a cash advance on their home equity, repaid only when they sell their home or die.

The loans are available to American homeowners who are 62 years or older. The proof in the pudding that seniors are in need of these loans is that within three months of a lending limit increase from $417,000 to $625,500--the number of federally insured reverse mortgage originations jumped 10% compared with the same period last year.

As some 70 million baby boomers hit their 60's, with less saved than they hoped for, industry experts are predicting that reverse mortgages will play an increasingly important role.

Reverse Mortgage Pros and Cons

One of the biggest issues today is that with the smell of blood in the water some lenders began very aggressive marketing and advertising campaigns. This has some folks in Washington concerned. In June, the Government Accountability Office said it had uncovered misleading marketing practices in the reverse-mortgage industry, and Missouri Senator Claire McCaskill, a longtime consumer advocate, chaired a hearing to investigate predatory lending tactics.

The big thing here is that there should be no cross selling of products, e.g., trying to persuade a senior to get a reverse mortgage and use the funds to buy an annuity or other financial product. To report abuse contact your local homeownership center.

However, things are not all bad. These loans have the real ability to help seniors in need. Comptroller of the Currency John Dugan recently noted that reverse mortgages can be difficult for some seniors to understand but under the right conditions, these loans can be a sensible solution to a tough financial situation. So if you or your parents are considering one, here's what you need to know:

1. The amount of money available to you is based on 3 things; age, home value, and interest rates. The best way to determine how much might be available to you is to talk to a reputable HUD approved lender. There's a form located on the How Do Reverse Mortgages Work website that you can complete and they will have only one of the top approved lenders contact you. This is important as many of the other sites submit your information to 4 or 5 lenders and you end up on everybody's call list.

2. There are no credit or income requirements to get a reverse mortgage, but you must be able to keep up with property taxes and insurance bills--or the bank may call your loan due.

3. As of today many lenders have gotten rid of bank related fees associated with reverse mortgages. The elimination of the origination fee, and in some cases the servicing fee will save the average home owner $5,000 to $10,000. It's unclear how long the fire sale on reverse loans will last so act now.

4. Finally, if someone is pressuring you to take one of these loans in order to buy something else, that's a huge red flag. Walk away.