reverseAdmit it: your head can spin from the seemingly never-ending TV spots of celebrities pitching reverse mortgages (we’re looking at you, Henry Winkler, and we’ve noticed that even an A-lister like Tom Selleck has recently gotten in on the action). So how exactly do reverse mortgages work, and what are their pros and cons? One of the best pieces on the subject we’ve come across is by John Persinos for “Under the arrangement, investors offer homeowners annuity-type payments for their homes, in exchange for the title of the home after the owner dies. Is the reverse mortgage a good investment deal? We examine the benefits and caveats.” In other major excerpts from his article:

“The home is still the biggest asset owned by most Americans. The Commission on Retirement Security and Personal Savings recently reported that there’s $12.5 trillion in home equity in the U.S. as compared to $14 trillion in retirement assets. Do the math: it’s likely that retirees will increasingly tap their home equity to make ends meet.

“Under a reverse mortgage, homeowners 62 and older leverage their home equity to extract cash from their homes without having to make a mortgage payment.
Reverse mortgage lenders take over the payments and recoup their investment once the home is sold (typically after the homeowner moves out of the home or passes away).

“Seniors rely on reverse mortgages to supplement Social Security and other existing income sources, cope with unexpected medical expenses, pay the college costs of grandchildren, take a long vacation…you name it.

“From an investment standpoint, the cash infusion of a reverse mortgage also can be used to buy stocks, bonds, mutual funds, or various insurance policies. Let’s take a closer look.

“Reverse mortgage homeowners are allowed to retain homeownership, with no mortgage payments. That’s a huge plus that allows seniors with insufficient income to tap their home equity without selling their domicile. Moreover, the income can make it possible for a retiree to delay taking Social Security payments in favor of larger payments down the road.

“The only reverse mortgage insured by the U.S. government is called a Home Equity Conversion Mortgage or HECM, and it’s only available via an FHA approved lender.

“Through a HECM, you can buy your primary residence if you’re able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you’re buying. To learn the rules and eligibility criteria, you can search online for a HECM counselor or call (800) 569-4287 toll-free.

“However, a reverse mortgage leaves a considerably diminished inheritance for your survivors. Also, if you don’t plan to stay in your house for at least five years after taking out a reverse mortgage, it makes little sense to bear the costs and hassle.

“As for those costs, they can add up. Costs such as closing fees, lender fees, and insurance tend to be high for reverse mortgages. What’s more, they aren’t paid up front: they’re represented in the offer for a reverse mortgage as reduction in the net amount to which you’re entitled. Not surprisingly, many seniors are getting gouged.”