April 2008
How they work
With a reverse mortgage, homeowners borrow part of the equity they have in their property, and the principal and accrued interest
are repaid only after they die or move out. Over time the owner's equity diminishes while the amount of the loan increases—the
opposite of a traditional mortgage. Unless you fall behind on taxes or allow the house to slip into disrepair, the lender
can't foreclose on the property, even if you live many years beyond expectations and the size of the debt surpasses the value
of the house itself. In most cases, the proceeds of a reverse mortgage can be taken in a lump sum, an open line of credit,
or as monthly payments.
Though reverse mortgages have been available for more than 25 years, they've become more widespread recently. In fiscal 2007, the Department of Housing and Urban Development insured upward of 100,000 reverse mortgages, compared with less than 7,000 in 2000. HUD, through its many authorized lenders, is by far the largest reverse-mortgage provider, with almost 90 percent of the market.
Several factors have fueled that growth. For one thing, older long-time homeowners have a tremendous amount of home equity, thanks to the run-up in property values over the last few decades and the fact that they've paid down or paid off their mortgages. On average, the home equity in a household headed by someone 62 or older was $230,000 in the first quarter of 2007, compared with $126,000 for the same period in 2000, according to Hollister Group, a risk-management consulting company.
Moreover, as average life expectancy continues to rise, older folks need more money than before to get through their retirement years. And they may be less concerned about passing on large sums to their children, who are often middle-aged and financially settled by the time of their parents' deaths.
"The combination of today's real-estate and aging trends makes the reverse mortgage a desirable alternative to cashing out your property without having to move out of your home," says Marc Louargand, principal at Saltash Partners, an investment company, and president of the American Real Estate Society.
Though reverse mortgages have been available for more than 25 years, they've become more widespread recently. In fiscal 2007, the Department of Housing and Urban Development insured upward of 100,000 reverse mortgages, compared with less than 7,000 in 2000. HUD, through its many authorized lenders, is by far the largest reverse-mortgage provider, with almost 90 percent of the market.
Several factors have fueled that growth. For one thing, older long-time homeowners have a tremendous amount of home equity, thanks to the run-up in property values over the last few decades and the fact that they've paid down or paid off their mortgages. On average, the home equity in a household headed by someone 62 or older was $230,000 in the first quarter of 2007, compared with $126,000 for the same period in 2000, according to Hollister Group, a risk-management consulting company.
Moreover, as average life expectancy continues to rise, older folks need more money than before to get through their retirement years. And they may be less concerned about passing on large sums to their children, who are often middle-aged and financially settled by the time of their parents' deaths.
"The combination of today's real-estate and aging trends makes the reverse mortgage a desirable alternative to cashing out your property without having to move out of your home," says Marc Louargand, principal at Saltash Partners, an investment company, and president of the American Real Estate Society.
