New Breed of Reverse Mortgages

Retirement is no longer a time to sit on the park bench and feed the pigeons. Today's retirees are more active than ever-launching second careers and focusing on physical fitness. New pathways await them in their golden years, even when it comes to home loans like the reverse mortgage, which can help their fiscal fitness, as well.

The reverse mortgage is a loan whose time has come-or at least, it's finally found a generation willing to tap it. The loan has been on the market for years, but is now enjoying increasing popularity among retirees. Previous generations have paid off their home mortgages and never touched another debt vehicle; but today's retirees are more comfortable with using their homes as a financial tool to help them pursue other passions.

Different kind of loan

The reverse mortgage allows homeowners who are 62 and older to convert their home equity into a source of income. The loan allows retirees to tap their equity either in monthly payments or as a lump sum. When the retirees no longer claim the house as their primary residence, the bank assumes ownership, and sells the property. Any interest the bank has charged for the loan is collected when the house is sold.

Traditionally, fees have been high on reverse mortgages, with the majority of them being government-backed Federal Housing Administration loans. However, private lenders such as Bank of America have entered the market and are offering higher loan amounts with smaller fees than those that are government-backed.

First choice or last resort?

Even with the slightly reduced fees provided by private lenders, costs still run higher than a traditional first or second mortgage. Insurance and origination fees can run upward of 4 percent of the loan amount, and there's approximately $1,000 in other closing costs. That's far pricier than the typical home mortgage, and may make some borrowers consider the loan only as a last resort. Some financial experts urge people to consider the option only if they're in their 70s or 80s and their income stream is running dry.

Traditional (and not-so traditional) alternatives

A time-honored alternative to the reverse mortgage is to sell your home and invest the accrued equity in an annuity product. Downsizing and investing the difference is a proven way to generate some cash flow.

There's also a new alternative to the reverse mortgage which involves parents borrowing money from their children. There are companies such as Circle Lending that provide consulting and loan documentation that can help children assume the role of the lender in the traditional reverse-mortgage model. With the Circle Lending model, a bank will never claim ownership of the home-it remains with the children.

The same caution that a retiree used to build a retirement nest egg should be exercised when considering loan offers. It's important to understand all the costs and long-term ramifications involved with loans. But if a cash incentive gets a senior off that park bench and engaged with life, then the reverse mortgage might be just the right option.