Pros and Cons of Reverse MortgagesĀ |Ā Jason Alderman

Over the last decade, reverse mortgages have been aggressively pitched in TV ads as an easy way for seniors to cash in their home equity to pay for living expenses. However, for many, improper use of the product -- such as pulling all their cash out at one time -- has led to significant financial problems later, including foreclosure.

In actuality, there are some cases where reverse mortgages can be helpful to borrowers. However, it's essential to do extensive research on these products before you sign.

Reverse mortgages are special kinds of home loans that let borrowers convert some of their home equity into cash. They come in three varieties:

Single-purpose reverse mortgages. Offered by some state and local government agencies and nonprofit organizations, these are aimed at low- and moderate-income borrowers. They are not available everywhere and can be used for only one purpose, such as home repairs, improvements, or property taxes. Federally insured reverse mortgages. Known as Home Equity Conversion Mortgages (HECMs), they are backed by the U.S. Department of Housing and Urban Development (HUD). This category may be a more expensive borrowing option than traditional home loans with high upfront costs. They tend to be the most widely available reverse mortgage option with no income or medical requirements. They can be used for any purpose.Proprietary reverse mortgages. These are private loans backed by the companies that make them.

Who can apply? Homeowners can apply for a reverse mortgage if they are 62 years old, own their home outright or have a low mortgage balance that can be paid off with the loan proceeds. Qualifying homeowners also must have the financial resources to pay for upkeep, taxes and insurance and live in the home during the life of the loan.

Consider the following pros and cons as a starting point for trying or bypassing this loan choice. Even though HECM loans require a discussion with a loan counselor, you should bring in your own financial, tax or estate advisor to help you decide.

Pros of reverse mortgages:

They're a source of income. Borrowers can select that the amount of the loan be payable in a lump sum or regular payments. Proceeds are generally tax-free. Final tax treatment may rely on a variety of personal factors, so check with a tax professional.Generally, they don't impact Social Security or Medicare payments. Again, important to check personal circumstances, but there are usually no penalties relating to members already receiving payments from any program.You won't owe more than the home is worth. Most reverse mortgages have a "nonrecourse" clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. Reverse mortgages may be a smarter option for some downsizing seniors. With proper advice, some borrowers use them to buy new homes.

Cons of reverse mortgages:

You may outlive your equity. Reverse mortgages are viewed as a "last-resort" loan option and certainly not a singular solution to spending problems. They're recommended generally for older seniors as part of a strategic package of financial solutions to allow them to stay in their homes as long as possible.You and your heirs won't get to keep your house unless you repay the loan. If your children hope to inherit your home outright, try to find some other funding solution (family loans, other conventional loan products) before you go with a reverse mortgage. Application fees can be expensive. Reverse mortgage lenders typically charge an origination fee and higher closing costs than conventional loans. This adds up to several percentage points of your home's value. Many reverse mortgages are adjustable rate products. Adjustable rates affect the cost of the loan over time.If you have to move out for any reason, your loan becomes due. Generally, this is triggered if you or your co-borrower hasn't lived in the home for a continuous year. So health issues provide real risk with this product.

The courts have recently put a stop to one of the most onerous problems with reverse mortgages. In October 2013, a Washington, D.C., federal court judge struck down a U.S. Department of Housing and Urban Development (HUD) policy allowing lenders to demand that surviving spouses immediately repay reverse mortgage loans when their spouse dies. Many widows and widowers were forced into foreclosure before this decision.

If you're considering a reverse mortgage, do some reading. The following agencies offer more extensive pro-and-con information on these products:

Bottom line: Reverse mortgages have become a popular and controversial loan option for senior homeowners. For some, these products may work well in special situations. However, every applicant should do extensive research and receive individualized financial, estate and tax advice in advance.

Jason Alderman directs Visa's financial education programs. To follow Practical Money Skills on Twitter:


1. Shop around

The Internet has turned me into a hardcore comparison shopper, and apartments are no different. There are dozens of apartment rental sites listing dozens of properties in my hometown. It pays to check out several of these sites when you're looking for a new pad. I mentioned a few sites you should use (and a few you shouldn't) in The Best (and Worst) Apartment Rental Sites.

But don't stop your search with your computer. I found my last apartment through a "For Rent" sign in the window. The place was $150 cheaper than anything else I found, and I never saw an online ad for it.

2. Move a few miles away

Location is everything in real estate. If you live in the most popular area, you're going to pay the highest rent. But if you move a couple of miles (or sometimes even a few blocks) away, you can get a serious discount. For example, renters in my city (New Orleans) pay about $1,250 a month to live in studio apartments on a trendy street. I live four blocks away and pay $750 a month for a one-bedroom. I don't get bragging rights, but I'm still within walking distance - and I'm saving $500 a month.

3. Wait

I start looking for a new apartment a month or two before I need one. If I find a place I like, I keep an eye on it. More often than not, private landlords lower their asking price if they don't find a tenant within a week or two.

4. Sign a longer lease

You're locked into your rent as long as you're under a lease. If you sign a longer lease, you'll be locked into the lower rate if the cost of rent goes up. Two years ago, my friend signed a three-year lease on his apartment. Last year, the landlord raised the rent $200 across the complex. By locking himself into a set rate for three years, my friend has saved $2,400 so far.

5. Haggle

I am not a haggler, but when it comes to my single biggest expense, I negotiate. It doesn't always work, but if you do your homework - and give the landlord a good reason - he may be willing to lower the rent. (Learn how to haggle here: The Simplest Way to Save on Everything.)

Start by researching the average rent in the area. If the landlord is charging more than everyone else, print out a few ads to prove it. Then convince the landlord that he should want you as a tenant. I ask for referral letters from my previous landlords, make copies of my bank statements, and pull my credit report. By showing the landlord that I'm a good tenant - and I know that he's over-charging - I can negotiate a better rate.

6. Look for free perks

I always compare the cost of the rent with the amenities or the utilities that are sometimes included. For example, I recently looked at two duplexes. One went for $775 a month but didn't include any utilities or a parking space. The other rented for $800 a month but included water, trash, Wi-Fi, and an off-street space.

Obviously, $775 is cheaper than $800. But when you consider the average water and trash bill in my area is $50 a month, and the average Internet cost is $45 a month, I'd actually save $95 a month by going with the more expensive rental.

7. Trade work for rent

If you have a skill a landlord needs, you might get a discount on your rent. My landlord rents a unit to a tenant who also serves as our maintenance guy. In exchange for doing the odd job, he gets $350 a month off his rent.

But you don't have to be handy with tools. Landlords occasionally need people to maintain their website, design rental ads, or manage their properties. If you've got free time, offer to trade your services for a discount.

8. Turn a profit on your rental

A few of my neighbors have made a quick profit by renting out their place for the night to tourists. Granted, there are some serious downsides to the idea - like your place possibly getting trashed - but my neighbor made $300 in two nights. If you live in a popular city, you could stand to make a profit a few times a year. Just make sure you get your landlord's approval - and ask for a security deposit before you open the door to strangers.

If you're a renter, also check out 6 Myths about Renter's Insurance - and How to Save and 9 Ways to Remodel Your Rental Without Breaking Your Lease.

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