Home Economics: Do your homework before getting a reverse mortgage

Reverse mortgages allow people 62 and older to borrow against their home equity. Like marriage, the experts say, these are arrangements not to be entered into unadvisedly or lightly.

That's because reverse mortgages are actual loans that must be repaid in full - when you move, when you sell your house, or upon your death, rather than in monthly installments.

But, said David Certner, AARP's legislative-policy director, they're something to consider "if you want to remain in your current home and don't have other options."

"If the one asset you have is your home, a reverse mortgage will let you turn it into a payment stream," Certner said. "Maybe you simply need a home-equity loan, or to sell the home and move to something smaller. For a lot of people who want to stay in their own homes, the reverse mortgage is one way to help accomplish that."

Though home values have dropped steeply since the real estate bubble burst in 2006, many older Americans have owned their houses for decades and have vast amounts of equity to tap into.

Yet of the millions of home loans originated between 1990 and 2010, just 660,000 were reverse mortgages, AARP says.

Why? Because reverse mortgages can be complicated, sometimes pricey affairs compared with the financial alternatives.

There are three kinds of reverse mortgages, but the lion's share - 95 percent - are Home Equity Conversion Mortgages insured by the Federal Housing Administration.

HECMs cost more than traditional mortgages. They have no income or medical requirements, and the cash can be used for any purpose, such as paying medical bills.

Currently, the national loan limit for an HECM is $625,500. How much you can borrow depends, among other factors, on your age, the appraised value of your home, and current interest rates.

The older you are, and the more equity you have in your house, the more you can borrow. Though 62 is the minimum age, many experts advise against reverse mortgages then - you may have a greater need to tap into your home equity later in life.

To qualify for HECMs, borrowers must own their properties outright or have small mortgage balances; occupy the properties as principal residences; and not be delinquent on any federal debts, such as income taxes.

Borrowers must participate in "consumer information sessions" provided by counselors approved by the Department of Housing and Urban Development. (These typically cost $125, Certner said.)

During the course of the reverse mortgage, you must pay your homeowners' insurance and property taxes, plus keep the house in good repair. If you don't, the loan can become due.

Advantages to reverse mortgages include:

How you get the money is your choice: in fixed monthly payments, a lump sum, a credit line, or a combination of the three. You can change the option any time for $20.

Even if you receive more in payments than your home is worth, you will never owe more than the home's value.

Loan advances are not taxable and generally don't affect Social Security or Medicare benefits.

You retain title to your home.

The reverse mortgage must be repaid in full when the last surviving borrower dies or sells the home, or when it is no longer the primary residence. An HECM lets a borrower live in a nursing home or other medical facility for up to 12 months before the loan comes due.

After the home is sold and the reverse mortgage and fees are repaid, the remaining equity belongs to the borrower or heirs.

Among the disadvantages:

Lenders, who must be FHA-approved, may charge servicing fees during the loan's term.

Loans may carry variable interest rates tied to short-term indexes, although AARP says more than 70 percent now have fixed interest rates.

If interest rates are fixed, you must borrow the maximum amount against your home's equity.

Refinancing your existing mortgage or taking out a home-equity loan or line of credit may be a less-expensive alternative to a reverse mortgage, which can have substantial up-front fees.

For example, the standard HECM loan charges a 2 percent mortgage-insurance premium up front on the home's value, not the amount borrowed. If you own a $400,000 house, the up-front premium would be $8,000, regardless of the loan amount.

You also will pay an origination fee to compensate the lender for processing the reverse mortgage. That fee can be up to $2,500 if your house is valued at less than $125,000. If your house is valued higher, lenders can charge 2 percent of the first $200,000, plus 1 percent of the amount over $200,000, with a cap of $6,000.

The HECM Saver Loan, which made its debut in October, charges only 0.01 percent of a home's value up front. But this loan usually carries a higher interest rate, and you can't borrow as much as you can with a standard HECM.

Closing costs for a reverse mortgage include an appraisal, a title search, and insurance, surveys, inspections, recording fees, taxes, and credit checks. You can pay for most such HECM costs through the proceeds of the loan. Though that means no out-of-pocket payments, it reduces the net loan amount available.

A lender may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate, $35 if the interest rate adjusts monthly.

Reverse-mortgage foreclosures have been rare - until recently.

"Because the borrower is responsible for paying taxes, insurance, and upkeep," Certner said, tough economic times have "put a lot of people in trouble, especially in hard-hit markets like Florida."