Reverse mortgages are hot. Baby boom demographics, inadequate retirement funding, and problems in the traditional mortgage market (pushing brokers into alternate products) have combined to make marketing of reverse mortgage products to senior citizen homeowners one of the hottest niches in the mortgage business.
Reverse mortgages are only available to homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining. The sales pitch for these loans is enticing: tax-free retirement income for as long as you own the home - even for life; no monthly loan payments; no repayments until the home is sold, and payment options flexible enough to meet any need! In many cases a reverse mortgage is the ideal tool for senior homeowners.
Federally-insured Home Equity Conversion Mortgages (HECMs) are the predominant type of reverse mortgage in the U.S. Recently, the number of HECMs originated has averaged about 9,000 per month, more than double the average in 2005. Moreover, about two-thirds of the the total HECM reverse mortgages ever issued have been originated in the last two years.
But many senior homeowners have taken out reverse mortgages only to end up paying them off (because of home sale, death, moveout, or other factors) within relatively brief periods. In fact, a 2007 HUD study shows that fewer than half of all HECM reverse mortgages have lasted longer than six years .
For shorter-term financing situations, it may be prudent to consider using a standard interest-only HELOC (home equity line of credit) in lieu of a HECM reverse mortgage. Under such a scenario, the borrower could draw from the line of credit, say, $1,000 each month for living expenses plus an amount sufficient to cover the monthly interest due on the loan. Similar to the way a HECM reverse mortgage works, loan interest would accumulate within the loan balance until it is paid off at the end of the loan period. Obviously, this tactic works only so long as there are adequate funds in the line of credit; for longer periods the strategy fails as HELOC reserves are exhausted while monthly loan interest payments are still payable.
The main benefit of a HELOC is that upfront borrowing costs are much lower than a reverse mortgage. The main drawbacks are that 1) payments covering at least the acrued interest on the loan are required each month and, 2) lenders will require upfront proof of ability to repay the loan (including credit score review and income verification). Neither of these factors are issues with a reverse mortgages.
Reverse Mortgage Information has a calculator that can help you make useful comparisons between HELOC and HECM loans, as well as lots of other information on reverse mortgages.