Cash-strapped seniors are becoming increasingly aware of the potential for living a better life by drawing on the equity they have built in their homes. One effective means of accessing this equity is through a reverse mortgage. According to Money Magazine, "last year, borrowers took out more than 132,000 reverse mortgages --50% more than the year before and almost 10 times as many as five years ago." However, as the number of people taking reverse mortgages loans rises, so does the potential for mortgage fraud. What should you know about the benefits and the pitfalls of a reverse mortgage?

Why Are Reverse Mortgages Popular With Seniors?

Reverse mortgages can be a great way for seniors to increase their standard of living by tapping the equity in their homes. Based on a formula that considers the age of the owner, the equity in the home, and the value of the property, reverse mortgage lenders would allow homeowners to borrow funds that do not have to be repaid until:

• The homeowner sells the home.
• The homeowner refinances into another mortgage.
• The homeowner dies.

Homeowners taking a reverse mortgage also have the option of receiving their funds:

• In a full cash payment.
• As monthly income.
• As a line of credit to be drawn when needed.

Reverse mortgage s allow seniors to keep their homes while relieving them of financial burdens. Selling the home would probably cost a commission of about 6%, the capital gain might be taxed (depending on the circumstances), and the seniors would still have to go buy or rent another home. Reverse mortgage s can be a smarter financial decision.

If Reverse Mortgages Are So Great, What Are The Pitfalls?

The cost of reverse mortgages can be steep, though typically less than the costs of selling a home. While new rules limit fees on Home Equity Conversion Mortgages, the fees still amount to several percent. Higher jumbo mortgage amounts are more expensive than that. In addition, there is a mortgage insurance premium.

Another potential reverse mortgage pitfall is that mortgages may be pushed by aggressive salespeople trying to sell other financial products, such as annuities. Annuities are insurance policies that offer varying payouts at different points in your life. But it makes little sense to free up liquidity by getting a reverse mortgage only tie it up again (and pay for the privilege!) by taking an annuity. It's a sure loser. Many seniors, unfortunately, were sold high cost annuities when taking out reverse mortgages , leading to less net income and potentially substantial penalties if the annuity needs to be cashed in earlier than agreed.

How Do You Find The Right Reverse Mortgage Lender?

First of all, according to AARP , avoid lenders who try and sell you annuities or other financial products with your reverse mortgage . Housing bill HR3221 makes it illegal for a lender to require that you use the loan proceeds to purchase any other financial product, so don't be pressured. Second, work with a reputable lender. If you have a mortgage lender you already like, chances are the company offers some form of reverse mortgage .  HUD-administered programs (HECMs) limit fees that can be charged and may be a good option. Finally, shop and compare disclosures from several lenders. Pay special attention to the Total Annual Loan Costs (TALC) disclosure that all lenders must issue to their reverse mortgage customers. A reverse mortgage is a big financial decision. Talk to a trusted financial advisor before making a commitment to a reverse mortgage . Your financial security and wellbeing are too much to risk by placing your decision in the wrong hands.

Sources:

www.aarp.org/money/revmort/revmort_basics

www.hud.gov

www.reversemortgage .org