Reverse mortgages allow people 62 or older to borrow against their home equity. But these arrangements are not to be entered into unadvisedly or lightly, 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, it's 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.
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.
They cost more than traditional mortgages. They have no income or medical requirements, and the cash can be used for any purpose, such as medical bills.
The older you are, and the more equity you have in your house, the more you can borrow. To qualify, 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.
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.
• Even if you receive more in payments than your home is worth, you will never owe more than the home's value.
• You retain title to your home.
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 the 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 upfront fees.