Are reverse mortgages really a good deal?

A growing number of senior homeowners, age 62 and older, seem to think they are a good deal. Their popularity is increasing every year and is on record pace for this year.

A reverse mortgage is a special loan that can provide extra money to help seniors supplement their income - an increasingly important necessity considering today's rising costs, like health care. The reverse mortgage can provide a monthly check for the borrower for the rest of their life, or until they sell or move away from the residence. Or the reverse mortgage can be paid out as a lump sum or line of credit.

The most popular type of reverse mortgage is the home equity conversion mortgage, insured by the Federal Housing Administration. There were 76,351 of these reverse mortgages sold last year, up from 43,131 in 2005. The number of sales is obviously growing at a rapid clip, and a bill was passed recently by the U.S. House of Representatives that would temporarily suspend the cap of the number of HECMs that can be insured by the FHA. That cap is now 275,000 HECMs.

The key reason for the rapid growth in sales of HECMs is the dramatic increase in home values. In a very short time, equities in homes have increased substantially, making it possible for senior homeowners to access a larger flow of income from HECM payments. Also, rising costs of almost everything makes it more important to generate added income. And seeing the potential for added profits, more lenders are now offering reverse mortgages.

But are the a good deal?

Before rushing out to purchase a reverse mortgage, study it carefully and shop around to more than one firm offering it as the Terms and fees can vary greatly with different companies. Also understand the fees involve, because they can be substantial. Most lenders are quick to point out that the fees can be rolled into the loan, but they are still being paid which will reduce the amount of money that you will receive from the reverse mortgage.

Beware of advisor shilling 'lump-sum' reverse mortgage

Here is another great question and answer article from Bob Russ that cautions about listening to any advisor that pushes lump-sump reverse mortgages for investment purposes:

Q: I began getting Social Security last February. This year I lost my job. A financial advisor suggests I take a reverse mortgage ''lump sum'' and invest it to supplement my Social Security income. I have no other income and no heirs. My home is worth about $400,000 with a $77,000 mortgage at 4.25 percent interest, which adjusts by 2 percent next year. I love my home and want to stay here as long as possible. Do you think a reverse mortgage will work for me?

A: Yes. But I am very worried that so-called financial advisor might have suggested you take a reverse mortgage lump sum so he can sell you an annuity or other investment to earn himself a large sales commission.

If you want to receive monthly lifetime income from a reverse mortgage to supplement your Social Security income, you can elect that choice direct from the reverse mortgage lender. You don't need that financial advisor to help you.

However, you will need to use $77,000 of your reverse mortgage entitlement to pay off your current mortgage. Then you won't have any more monthly mortgage payments. The balance of your reverse mortgage can be taken as lifetime monthly income, a credit line (except in Texas), lump sum or any combination.

Robert J. Bruss is a California lawyer and licensed real estate broker. Leave your questions at www.bobbruss.com