Making Cents: Reverse mortgages gain favor

Once considered a desperate move by cash-strapped retirees, reverse mortgages are entering the mainstream as a tool for retirement income planning. These types of loans are highly regulated, and each customer must attend a counseling session from a HUD-approved agency.

Unlike a traditional mortgage, there are no income, credit or employment requirements to qualify for a reverse mortgage. To qualify, borrowers must be at least 62 and own and live in the home as their principal residence. The owner must own the home without a current mortgage or have a current loan with a balance that is less than 65 percent of the home's value.

Congress just raised the limits on reverse mortgages to $625,500, up from $417,000. The actual amount that you may receive is based on your age, the value of the home and the current interest rate environment.

Proceeds from the reverse mortgage can be received as a lump sum, equal monthly payments for a specified time period, or as a line of credit to draw down whenever you want.

The proceeds are received income-tax-free and do not count as income for Social Security qualification or taxation purposes. Even if you take a lump sum, there are never any payments to make on the loan.

The borrower retains both title and control of the property as long as it remains as your primary residence, the taxes and bills are paid and the home is maintained to Federal Housing Authority standards. For couples, at least one of the married couple must remain in the home. Any remaining home equity is available for the owners or their heirs.

These loans can be used to eradicate existing mortgage payments, to pay for needed home repairs, pay down credit card or other high-rate revolving debt or to supplement daily living or health care expenses. With many a retirement portfolio devastated in the market collapse of the past year and the current very low interest rates available on savings, this method of improving retirement cash flow is beginning to pick up steam.

The downsides to a reverse mortgage include fees. Fees for a reverse mortgage are considerably higher than those for a traditional loan. Another potential downside comes to those who take their proceeds up front. These borrowers may subject the newly borrowed cash to investment risk or otherwise earn less in interest than the cost of the loan. Also, having that large cash balance on hand may affect eligibility for other forms of aid, such as Medicaid.

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