Reverse Mortgages Help Seniors in a Challenging Economy

While most exotic mortgage products marketed in the past 10 years resulted in loss and crisis, the much-maligned reverse mortgage has bucked the trend. Although it's a rather misunderstood instrument, the reverse mortgage has emerged as a savior for many seniors who are strapped for cash.

The reverse mortgage used to get lumped in with predatory loan products and high-risk negative amortization mortgages. Recently, however, it has regained popularity and stature thanks both to new reverse mortgage guidelines meant to protect seniors, and efforts to better inform consumers about how reverse mortgages work. The fastest-growing segment of the American population is now either past retirement age or about to enter it. That means that the reverse mortgage, which is available only to homeowners who are at least 62 years old, is poised to become one of the most demanded mortgage products of all.

Lifeline for seniors

In the wake of recent economic events that have wiped out the savings, assets, and pensions of millions of seniors, the reverse mortgage has gained even more credibility. The fact is that the reverse mortgage is one of the only reliable ways for retirees to gain access to money needed to pay bills and survive the financial crisis. Others are using their reverse mortgages in lieu of retirement plans that have become obsolete due to catastrophic losses in the stock market. As these seniors discover exactly how reverse mortgages work, they're getting a pleasant surprise and much-needed reassurance and confidence.  That's because when used appropriately, the reverse mortgage is loaded with attractive benefits.

Benefits of reverse mortgages

Lenders generally don't consider credit history with reverse mortgages, focusing instead on the balance remaining on any existing mortgage and the market value of the home.  Under President Obama's new economic stimulus package, the limits on reverse mortgages have been raised from $417,000 to $625,500, which gives seniors with more valuable homes the opportunity to draw down more cash. New federal reverse mortgage guidelines also cap fees and provide credit counseling.

With a reverse mortgage, the lender makes payments to the senior homeowner, based on the property's equity when the reverse mortgage is put into place. Homeowners usually stay in their residences and use the income stream to pay bills. But under newer reverse mortgage guidelines, it's also possible for homeowners to use a reverse mortgage to buy another primary residence. That makes it feasible to buy a new home without making monthly payments or having to sell a home in today's lackluster market.

Seniors can choose to be paid in one of four ways:  through a lump sum; through a monthly cash advance; through a line of credit to be taken out at any time; or via a combination of these methods. Even if the value of the home declines, the total debt will never exceed the property's value. The reverse mortgage company will incur any losses, not the homeowner or the homeowner's heirs.