A house can be more than just a building full of memories.
For many seniors today, houses are a source of income.
Over the last decade, reverse mortgages have become increasingly popular. These mortgages, available only to seniors 62 years and older, allow homeowners to cash in their equity to have money for a variety of expenses, from monthly utilities to medical bills to remodeling costs.
"It allows homeowners to use equity in their home to create a source of income," explains Kelly Perry, a financial consultant with Thrivent Financial Loyalhanna Group.
"It allows the homeowner to get money out of their home."
These loans work the opposite of traditional forward mortgages. In a forward mortgage, a homeowner borrows money from a mortgage company or bank. They then pay back the loan in monthly installments, plus interest, until the loan is paid off and they have full ownership of the home.
In a reverse mortgage, the homeowner receives money from the mortgage company based on the home's equity. No payments are made until the homeowner sells the home or no longer uses the house as their primary residence. Once the home is sold, the reverse mortgage is paid back.
"They do pay back principle and interest," says Jan Merriman, a reverse mortgage specialist with Metropolitan Mortgage in Greensburg. "If the house appreciates, the heirs keep the increase in value."
These loans allow people to take 50 percent to 60 percent of the equity from their home, so they never lose their home to the bank.
For example, if a home is valued at $100,000, then the homeowner can borrow up to 60 percent, which is $60,000. There are several ways to obtain the money. A homeowner can get a fixed monthly amount.
"The idea is life expectancy," Perry says. "There are things they take into consideration. They're not going to give you $10,000 a month. They will give you a payment over a 25- or 30-year period."
Other options include taking a lump sum or opening a line of credit, which allows them to take money when they need it.
There are several different types of reverse mortgages. The most popular is the Home Equity Conversion Mortgage (HEMC). This loan is backed by the Department of Housing and Urban Development (HUD), which was the first institution to offer reverse mortgages.
Those wishing to get a HEMC must first meet with a HUD counselor. The Federal Trade Commission also sanctions Single-Purpose Reverse Mortgages, which are offered by state and local government agencies and non-profit organizations, and Proprietary Reverse Mortgages, which are private loans backed by companies.
While reverse mortgages sound like a great idea, they may not be right for everyone.
"We recommend they work with a financial planner or a professional to see if they should really do this," Perry says. "Whether they are appropriate is part of a financial plan."
Merriman believes more people are aware that reverse mortgages exist, but that is not always a good thing.
"There has been some bad publicity about it because some insurance companies are pushing annuities." She says using a reverse mortgage to open an annuity account is a bad idea because those types of accounts prevent people from having access to their money.
People may find a lot of information on the Internet, but they must be careful where they look.
Federal web sites, such as the one for the Department of Housing and Urban Development (www.hud.gov), are full of helpful information. But there are just as many web sites that are home to a variety of companies that may lock a person into a less than favorable contract.
"You have to be careful because some are attached to a specific lender," says Merriman about web sites. "I'm concerned about seniors that can be pulled into something."
However, she does believe that reverse mortgages can be beneficial "if there is no other avenue" and "for the right situation."
Some good reasons for a reverse mortgage include paying off bills, allowing the client to retire, or paying for long-term care. Reverse mortgages can also enable some to purchase a life insurance policy, or even take a dream vacation.
"The biggest percentage of people uses it for health care," says Merriman. "They can also use it to pay off an existing mortgage on their home. If they are taking it out just to take out equity, then no."
