Is a Reverse Mortgage for You?

Dear Liz:

I'm struggling with my costly home loan. To pay it off, I'm considering applying for a reverse mortgage. Is it true they've gotten cheaper?

A lower-cost version now exists, but you shouldn't rush into one.

A reverse mortgage is a loan against your home equity that you don't have to pay back as long as you live there. Assuming you have enough equity in your home, you could use a reverse mortgage to pay off your existing mortgage.

The federally backed reverse mortgage known as a Home Equity Conversion Mortgage comes in a new, cheaper version. Whereas the traditional HECM Standard loan requires an up-front mortgage-insurance premium of 2 percent of your home's value, the new HECM Saver charges just one-hundredth of 1 percent (but the amount you can borrow is lower).

Here's the problem: These loans can still be expensive. In addition to the up-front premium, HECMs impose annual insurance costs equal to 1.25 percent of your loan's value. Other up-front fees may total thousands of dollars.

If you plan to move within a few years, a reverse mortgage may not be worth the costs. Before agreeing to a reverse mortgage, consider other alternatives such as downsizing, refinancing, or arranging a loan privately with a family member, using your home equity as collateral.

The Risks

One of the upsides of a reverse mortgage: You don't make payments to a lender. But you can still default on the loan if you fall behind on your property taxes, homeowner's insurance, or homeowner-association fees, or if you fail to keep your home in good repair. As of March 2010, the federal government reports, more than 20,000 reverse-mortgage borrowers were in default on HECM loans. And if you default, you could lose your home.

Liz Weston, author of Your Credit Score: Your Money and What's at Stake, blogs at asklizweston.com.