Q: Is there a cheaper alternative to a standard HECM reverse mortgage?
A: The new HECM Saver loan, which debuted in October 2010, charges only 0.01 percent of a home's value up front. The loan has some restrictions, however. The HECM Saver usually carries a higher interest rate and you can't borrow as much as you can with the HECM Standard. The amount you're allowed to borrow depends on your age, the value of the home and the interest rate. Both HECM Saver and HECM Standard loans require borrowers to pay mortgage insurance premiums on an ongoing basis equivalent to 1.25 percent annually of the outstanding loan balance.
Q: What's the best age to take out a reverse mortgage?
A: Although people are eligible at 62 to apply for a reverse mortgage, AARP policy expert Donald Redfoot says people should postpone getting a reverse mortgage as long as they can to ensure that they will have money later in life for needs like long-term care. Recent HUD data show the average age of borrowers has decreased from 77 to 73 years. "Getting rid of a forward mortgage may seem like a good idea by freeing up income, but borrowers need to understand that they are trading future savings for current consumption," Redfoot says. "Those who borrow early in retirement risk not having that equity available later in life when they may need it."
Q: What are the alternatives to a reverse mortgage?
A: "These loans serve a particular niche, but they are not for everyone," Redfoot says. Before choosing a reverse mortgage, you should consider other options, such as selling your home. You could use the proceeds to downsize to a smaller (and cheaper) residence, or you could rent. If you want to stay in your home but need help making ends meet, think about getting a roommate. Start with family members or friends with whom you're compatible. Besides financial relief, a roommate offers companionship and can contribute to the upkeep of your home. Depending on the value of your home, you might be able to refinance your mortgage, or take out an equity loan or line of credit.
Don't forget to explore the availability of public benefits. For example, if someone has major health care or long-term care needs and a low income, they may be eligible for Medicaid assistance.
Updated Fall 2012