Reverse mortgages gain favor, but aren't for everyone

Personal Finance. By Katherine Vogt, AMNews staff. July 11, 2005.

Reverse mortgages, once a safety valve for struggling retirees, are now being pitched as a cash-in prospect for seniors of all income levels.

A reverse mortgage looks like a home-equity loan, except that the homeowner does not actually give up any equity. Instead, a homeowner puts a residence up as collateral for a loan, tied to the value of the home, that can be paid out as a lump sum or in monthly installments. The loan does not have to be paid back until the homeowner moves, or dies.

Reverse mortgages have been around for more than 40 years, but it wasn't until the past few years that their popularity took off. The reason: the recent surge in housing prices.

For someone living on suddenly hot property, cashing in without giving up home equity might be tempting. Especially with the loan proceeds being tax-free.

For physicians -- many of whom have less time to save for retirement than other professionals -- reverse mortgages can be a safety net to provide cash if other investments haven't met expectations or have been drained, said Carlo Panaccione, a financial planner in Redwood City, Calif., who works with physicians.

"It could be the sedative to let them know that if they bought that big house, there may be a way to use it in retirement, if they need it," he said.

On the other hand, reverse mortgages are not always easy money. The loans themselves have much higher fees than a home-equity loan -- a typical reverse mortgage might have fees at 6.8% of the loan. For homeowners who plan to sell their places in a short amount of time, taking on such costs might not make sense.