Retirement: Are reverse mortgages right for you?

Meet the “kinder, gentler reverse mortgage,” said Tom Lauricella in The Wall Street Journal. These days, securing a reverse mortgage—loans in which homeowners 62 and older can “sell” the equity in their house to a bank—is getting tougher. But “most financial advisers say that’s a good thing.” Reverse mortgages can help older homeowners stay in their homes, since the loan doesn’t need to be paid back unless the borrower moves out or dies, but they do come with some pitfalls. Luckily, new federal guidelines “should make it harder for borrowers to dig themselves into a hole.” Last year, the Department of Housing and Urban Development put limits on how much reverse mortgage holders could borrow, capping first-year loan payments at 60 percent of the available home equity. Homeowners then have to wait until subsequent years to “tap the remainder of the equity.” And HUD is considering another rule change, requiring borrowers “to set aside money up front to pay property taxes and insurance” if the lender determines the homeowner is at risk of failing to meet those obligations.

But there are other traps to be wary of, said Mitchell D. Weiss in Credit.com. While “reverse mortgages are a legitimate financial alternative” for elderly homeowners in need of cash, borrowing against one’s home is not always the wisest move. As lenders get more conservative, borrowers might not recoup as much as they’d like. And since “cash has a way of getting spent,” homeowners will have “little left to tap” if they face financial trouble. Then there are the fees, said Hal Bundrick in USNews.com. Reverse mortgages are often more expensive than other home loans, and the new rules could make them “even pricier.” In addition to lender fees, borrowers must also pay closing costs and mortgage insurance that is effectively “an ongoing fee for the life of the loan.”

And reverse mortgages can even be a headache for your heirs, said Jessica Silver-Greenberg in The New York Times. When the last surviving borrower dies, heirs “are supposed to be offered the option to settle the loan” for 95 percent of the property’s current market value. But lenders don’t always play by the rules, leaving survivors to navigate a confusing maze of regulations and foreclosure threats. As always, experts say you should know your rights. Under federal rules, lenders must also “offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing.”

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