While they can be great solutions for many people, reverse mortgages are not well-understood by the majority of the population. And most people are naturally queasy about making a large financial commitment they don't understand. The good news, however, is that according to a survey by AARP, about 90% of senior borrowers were satisfied with their reverse mortgage decisions. The odds of having a successful experience with reverse mortgage lenders are definitely in your favor. Use these tips and put even more leverage behind your choice.

1.      Make sure you are a good candidate for a reverse mortgage.
Reverse mortgages come with fairly high upfront costs, usually several percentage points of the total loan amount. They are a long-term solution for those who need extra income to live comfortably and safely, and expect to remain in their homes for an extended period of time. So if you are in poor health, planning a two-year jaunt around the world, or thinking of moving to be near your children, a reverse mortgage is probably not for you.

2.      Match the reverse mortgage to your needs.

Reverse mortgages come in many guises. If you have a low-to-moderate income and need money to pay property taxes, maintain, repair, or improve your home, you may qualify for a single-purpose reverse mortgage. These are typically offered by state and local governments as well as community organizations, carry very low rates, and require low or no fees. Area Agencies on Aging (AAAs) can tell you if you qualify for available programs. Call 1-800-677-1116 for information.

You may choose a federally-insured Home Equity Conversion Mortgage (HECM). Fees on these loans are limited by federal regulation and are therefore lower than fees on many other loan programs. However, your loan amount may be limited to less than you'd like if you have a higher-value home.

Jumbo reverse mortgages are proprietary products offered by many lenders. You will be able to get more but will probably have to pay more, also. Because rates and fees can vary on these mortgages, it is most important to shop with several lenders and compare before committing.

3.      Get what's coming to you: your reverse mortgage disclosures.

In addition to the disclosure forms you'd be given when applying for a regular mortgage, federal law requires your lender to provide you with some special forms. The most important is called a TALC, or Total Annual Loan Cost disclosure. Unlike a normal mortgage, the term of a reverse mortgage is unknown, and the cost to you depends on, among other things, how long you hold the loan. The TALC form is designed to show what the loan will cost you over time. The percentage rates are presented in an easy-to-read table. Get several from various lenders, then compare. The lowest TALC rate for the time you expect to keep the home is probably the best deal for you.

4.      They can pay you now…or pay you later: choosing reverse mortgage payouts.

Again, this decision should match your timeframe and purpose. If your time horizon is shorter, say a few years, taking the money as a lump sum is the least expensive way to borrow it. If you expect to remain in your home for the long haul, you'll probably come out ahead by opting for monthly payments. Other factors include the affect a large sum might have on benefits like Medicaid, and how disciplined you feel you could be if you had easy access to a pile of money. It's an individual decision.

5.      Buyer beware: reputable reverse mortgage lenders don't sell insurance, too.

How can you avoid the biggest pitfall of all when shopping for a reverse mortgage? By refusing to deal with companies who suggest that you take a reverse mortgage to finance this great investment they want to sell to you. In fact, housing reform legislation HR 3221 specifically prohibits lenders from requiring that you purchase any investment vehicle as a condition of getting your loan. Typically, the investment offered is an annuity, which requires that you tie up your money for a considerable period of time or pay very stiff penalties. It doesn't make sense to do a reverse mortgage and free up your cash, only to pay a commission to a salesperson to tie your money back up! And the interest rate you receive on annuities doesn't cover what you'll be paying for the reverse mortgage. So avoid this losing proposition and the people who push it.

Reverse mortgage shopping involves a complicated set of calculations that depend on events that may or may not occur. Your most important step is taking your best guess at where your life will take you, then using the TALC to choose the reverse mortgage that gets you where you want to be.

Sources

AARP

FTC

HUD