Reverse mortgages have gained a bad reputation over the years, but they can be a useful financial tool to seniors when used appropriately, said David Johnson, associate professor of finance at the University of Wisconsin-Superior.

1. www.ZReverseMortgage.com

2. Older homeowners often use reverse
mortgages to pay off their traditional mortgages
so they can get rid of their monthly house
payments. Is that a wise strategy?
Reverse mortgages have gained a bad
reputation over the years, but they can be a
useful financial tool to seniors when used
appropriately, said David Johnson, associate
professor of finance at the University of
Wisconsin-Superior.
A home equity loan in which the borrower is not required to make payments. The
homeowner must be at least 62 years old. A reverse mortgage accrues interest
and does not have to be repaid until the homeowner dies or moves out of the
house. The Federal Housing Administration calls it an HECM, for home equity
conversion mortgage.
Reverse Mortgage

3. Not Only for The Desperate
“Years past, financial planners didn’t view reverse mortgages as a planning tool,”
said Johnson, who recently co-authored a study discussing the growing
importance of reverse mortgages in retirement. “It was viewed as a last resort and
they assumed that the only people that do reverse mortgages are people that are
desperate. Clearly that’s not the case, and I think they are starting to view it
differently now.”

4. Why get a loan when you already have one?
One of the most common reasons homeowners
get reverse mortgages is to pay off their existing
mortgage so they have more income to worth
with, said Maggie O’Connell, who runs
ReverseMortgageStore.com.
“They already have this debt on the house, so
instead of making their mortgage payments they
are just paying it out of their equity before they
leave the home,” she said.
What it takes to get a reverse mortgage

5. To qualify for a reverse mortgage, the homeowner must be at least 62 years old
and have sufficient equity in the house. The size of the loan depends on the value
of the home, the age of the youngest borrower and how much is owed on the
house. The owner must pay property taxes, insurance.
How equity is cashed out
With reverse mortgages, homeowners have three options for cashing out equity:
 Receive monthly payments.
 Get a lump-sum payment.
 Maintain a line of credit.
Many homeowners are conservative and just want to eliminate their mortgage
payments, but they like having the credit line available, said Beth Paterson,
executive vice president of the Reverse Mortgages SIDAC in St. Paul, Minnesota.

6. “Maybe they don’t need the money right
now, but down the line they might have a
medical emergency, so it’s good for them
to have the option,” she said.
One borrower’s experience
That was the case with Barbara Hiebert
after her husband died. Their house was
mortgage-free
but she knew her retirement income wasn’t enough to cover some of her expenses,
including medical emergencies. She got a reverse mortgage but didn’t access the
money until she had no other option.
“I rely on it only when I need it,” she said. Recently, she hurt herself after falling and
spent more than $10,000 during her at-home recovery.

7. “I had people come in for three hours in the morning and at night,” she said. “It
was expensive. I couldn’t have afforded it without the reverse mortgage.”
What about the kids?
As with many other seniors, Hiebert said she hesitated when she first heard of
reverse mortgages because she wanted to leave her condo to her children.
But they told me, ‘We don’t want you to think like that. We have money to take
care of ourselves. We don’t want you to worry,'” she said.
The name stays on the title
In addition to the guilty feeling, some seniors are confused about the process and
worry that once they get a reverse mortgage they no longer own the house,
Johnson said.

8. Once the homeowner dies, the heirs are given
the option to pay off the loan and keep the house
or sell it to pay off the loan. If the house sells for
more than the amount owed, the heirs receive
the balance. If the loan is bigger than the loan
value, the bank takes all the proceeds, but the
balance of the loan does not have to be repaid.
One of the reasons reverse mortgages have gained a bad reputation is because
many view them as too costly. But they are no different from conventional
mortgages in terms of costs, said Peter Bell, president and CEO at the National
Reverse Mortgage Lenders Association.
It’s still going to be accruing interest on the house the same way as a conventional
mortgage,” he said. “The question is whether you are going to be making those
monthly payments now or let that be paid off later.”
Costs of Getting a Reverse Mortgage

9. Borrowers also are required to pay for mortgage insurance when they get a reverse
mortgage. As with the interest, the mortgage insurance costs are paid with equity.
The insurance protects lenders (not borrowers) from losses.
It’s essential to understand
Because the homeowner isn’t making monthly payments to cover upfront costs,
interest and mortgage insurance, the equity on the house can quickly shrink as the
loan balance gets bigger over time.
It’s crucial that seniors receive the required counseling before getting a reverse
mortgage.
“For consumers, the most important thing they can do is to become educated on
how it works,” Johnson said. “A reverse mortgage is not the solution for everybody,
but clearly it’s an option for many people and the more information they know, the
better they can understand how the product works and they can make an informed
decision.”