Increasing numbers of senior citizens are drowning in debt for a variety of reasons. Some have taken huge hits to retirement accounts, some have high medical bills, and others are just poor managers of their money. Here are some things older adults should consider if planning to use a reverse mortgage to pay off debt.

Reverse Mortgages Need to Be Budgeted

You can choose a tenure option, which provides monthly payments for the rest of your life, or you can get higher monthly payments for a specified term, a lump sum, or a line of credit to draw on. But regardless of the way you choose to receive your proceeds, you still need to find the best way to use the money. Draw up a budget and stick to it. To keep medical expenses from throwing a monkey wrench into your plans, consider supplemental insurance or catastrophic coverage.

Pay off Debt and Stay Out of Debt

Public-policy group Demos found in a study that low- and middle-income Americans 65 and older who carried credit card balances for more than three months had average credit card debt of $10,235, according to the Washington Post. This average is 26% higher than in 2005.

If you do use the proceeds from a reverse home loan to pay off credit cards and other debt, stop using those cards and pay cash for purchases. There is no point to getting a reverse mortgage to pay off your cards if you just go out and run up new debt. Speak with a reverse mortgage counselor and get several reverse mortgage quotes to decide if a reverse mortgage can help with your debt reduction plan.

Critics of reverse mortgages continue to issue warnings that these loans are likely to be at the center of the next financial crisis. But elderly homeowners have flocked to these loans in larger numbers as they have struggled to make ends meet during this recession. For people considering borrowing with a reverse mortgage, here are some of the things to understand about what these loans can and can’t do.

What Reverse Mortgages Can Do

1. Reverse mortgages can convert home equity into cash. This can give senior citizens another source of income to pay medical bills, fix up their homes, or retire debts.
2. Reverse home loans can allow you to avoid foreclosure and stay in your home.
3. These loans can allow you to reduce your living expenses if you previously made monthly payments on a mortgage.
4. Reverse mortgages can cut into the amount of inheritance left for your kids.

What Reverse Mortgages Can’t Do

1. These loans can’t get you out of paying home owner’s insurance and property taxes. If you stop paying on these items, the reverse mortgage lender could call in your loan.
2. Reverse home loans can’t be obtained by people under 62 years old.
3. A reverse mortgage can’t fix any problems you have with overspending. If you have trouble managing your money and carry a lot of debt, consider talking with a credit counselor.

A reverse mortgage counselor can provide more information about these loans, such as what kind of fees are involved, and how the money is paid out. You can also get free reverse mortgage loan quotes from reputable lenders. No one should sign up for a reverse loan without gathering as much information as possible. Learn more about reverse mortgage myths and facts.

Some seniors who had option ARMs have been helped by receiving reverse mortgages from their lender. It issued the loans for about twenty people who were seriously at risk of losing their homes through foreclosure, according to the Wall Street Journal.

What Is an Option ARM?

Pay-option adjustable rate mortgages, also known as option ARMS, have come under fire because some borrowers say they were not given enough information about how the loans were structured. Some borrowers have even filed lawsuits against mortgage lenders over the loans, claimin they didn’t understand what they were getting into. Option ARMs allow borrowers to choose from several payments, from a minimum one that doesn’t even cover the interest that accrues each month to a payment that would retire the loan in fifteen years. Many chose to pay the smallest amount possible each month on their mortgages, and they actually saw their balances increase because those payments didn’t cover the monthly interest.

How Can a Reverse Mortgage Help?

So how does getting a reverse mortgage help the homeowners who previously had option ARMs? The bank agreed to modify the terms of some option ARM and sub-prime mortgages.

One homeowner featured in the Wall Street Journal article owed a lot more on an option ARM than his house was worth. The bank agreed to write down a portion of the amount owed and then issued a reverse mortgage. However, unlike normal reverse mortgages where the proceeds go to the homeowners, the bank paid the money to itself.

Reverse Mortgage Instead of Foreclosure

The homeowner is now able to live in the home without making monthly payments on that mortgage. If that person dies, Bank of America owns the home but his heirs can choose to buy it back for the amount of the loan with interest. A spokesman said the bank loses money by doing the write-downs, but not as much as if the home went into foreclosure.

Actor Peter Graves of “Mission Impossible” has signed on as the spokesperson for reverse mortgage lender American Advisors Group, according to an article at Reverse Mortgage Daily. While you may admire Graves as an actor or other celebrities who endorse products, that doesn’t mean you should sign up for a reverse mortgage or other financial products because of a commercial. Rather than go by the popularity of a celebrity, it’s important to look at the facts when evaluating financial products like reverse mortgages.

Reverse Mortgages and Endorsements

Recent Federal Trade Commission rule changes require celebrities to actually use the products they claim to use in endorsements, as discussed in a Consumer Reports article. But it can be tricky because even though celebrities may recommend that people go out and sign up for a reverse mortgage or other product, they may just be expressing their opinion. They may not necessarily claim to use that type of loan themselves.

What to Look for in a Reverse Mortgage

Instead of focusing on celebrity endorsements when shopping around for a reverse mortgage, consider the following things:

• How do you expect a reverse mortgage to help your financial situation?
• Are you just jumping on the reverse mortgage bandwagon because you’ve seen others take out such loans?
• Have you worked with a reverse mortgage counselor who took the time to really explain how these loans work?
• Have you compared several reverse mortgage quotes to find the best deal?
• Can you afford the fees involved with getting a reverse home loan?
• Can you afford to cash out your home equity?

Getting a reverse mortgage is a big decision that affects your finances for years to come. These loans can be a useful tool for finding more income. But never make the decision to sign up for a reverse loan or other financial product just because it is endorsed by a famous celebrity.

When comparing reverse mortgage loans, it’s important to look at how much cash you can actually get over the life of the loan. The amount you receive depends on how you take the money.

Lump Sum Payout

You can choose to take the cash from a reverse mortgage as a lump sum payment. The money can be spent however your choose, including for household repairs, medical expenses, or travel. You also could choose to invest some of the proceeds in an interest-bearing account such as a certificate of deposit if you want the balance to grow.

Reverse Mortgage Line of Credit

If you take proceeds from a reverse home loan as a line of credit, there are a couple things to keep in mind. First, unlike a lump sum distribution, you only pay interest on amounts that you actually use. Second, an attractive HECM feature is that its credit line grows larger over time. This means that the amount of cash available to you increases until you withdraw the full amount.

For example, if the credit line equals $100,000 and you withdraw $20,000, you would have $80,000 left. But if you leave it alone for a year, your available amount grows by slightly more than the rate being charged on your loan balance–your interest rate plus .5%. If your interest rate were 5.5%% per year, your available credit line in a year would be $84,800 (6% x $80,000 = $4,800).

Term or Tenure Distributions

Under the term option, borrowers may receive monthly payments for a fixed period they select. Under the tenure option, borrowers may receive monthly payments until they no longer occupy the home as a principal residence.
Tenure distributions result in lower monthly payments to you because the lender doesn’t know the duration of the payments–you could conceivably get more than the value of your home and you won’t be responsible for the difference. Term disbursements allow for higher payments.

Finally, as long as you haven’t used up the entire available equity, you can alter the way you receive your funds, so if your circumstances change, your HECM can as well.

Many small business owners are having a tough time getting approved for credit in this tough economy. Banks have tightened lending standards, making it difficult to get all types of loans. For some business owners over 62 their best chance of obtaining financing may be a reverse mortgage, but doing so does involve some risk, according to Entrepreneur magazine. Here are some things to consider before using a reverse mortgage loan to finance a business.

Reverse Mortgages and Home Equity

Converting home equity to cash can give you access to funds to start and grow a business. The money can be received as a lump sum or a line of credit. Credit lines are useful if you just want a backup source of cash flow but don’t necessarily need a huge sum upfront. The money also doesn’t have to be paid back to the mortgage lender until you leave your home or die. However, reverse mortgages tend to have more fees than conventional loans, and interest rates are usually variable. Have a reverse mortgage counselor crunch the numbers to determine the real cost of getting a reverse mortgage. You can compare reverse mortgage quotes here.

Leaving an Inheritance

If one of your financial goals is to leave an inheritance for your kids, a reverse mortgage may not be the best choice. Cashing out home equity can cut down on the amount of inheritance you leave to your kids, unless you are certain of leaving them a successful business instead. They also end up responsible for paying off the loan if they really want to keep the house after your die.

Ultimately, you may find that it makes more sense not to use a reverse mortgage to finance your business. There may be other sources of funding that work better, such as loans from family or friends, your own savings, or even loans through social lending networks.

The possibility of foreclosure can be scary and stressful. But if you experience a job loss or have a limited income, foreclosure may be a very real possibility. Recent statistics say there is a foreclosure filing every 13 seconds, according to Reuters. Here’s what you need to know about whether a reverse mortgage can help you avoid foreclosure.

U.S. Foreclosure Filings

So far this year there have been about two million foreclosure filings, according to the Center for Responsible Lending. This isn’t a sub-prime problem–many of the homeowners losing their homes have prime mortgages. Homeowners over 62 who face a possible foreclosure could find some relief with a reverse mortgage, which allows you to convert home equity to cash and requires no payments from you.

Reverse Mortgage Counseling

Deciding to tap home equity is not a decision that should be taken lightly. But using a reverse home loan could allow you to find a new source of income to pay for medical bills, home repairs, and other expenses. Schedule a reverse mortgage counseling session to learn more about these loans and whether or not one can help you. Reverse mortgages aren’t for everyone and should be considered on an individual basis. Just because you know someone who got a reverse home loan doesn’t mean you necessarily should.

Older Borrowers Get More Money

If you are still in the workforce and not yet 70, a reverse mortgage could be premature. That’s because the older you are and the more your home is worth, the more money you qualify to receive with a reverse mortgage. Get reverse mortgage quotes from reputable lenders to find out how much you might be able to borrow. But if you can get by on your income, or redo your household budget to make your money go further, that may be a better option than tapping your home equity at this time.

A new report says that some practices in the mortgage market could result in some of the same problems that plagued the sub-prime mortgage industry. While reverse home loans can be a useful tool for senior citizens, the report by the National Consumer Law Center (NCLC) is a reminder that it is important to carefully investigate reverse mortgage products before signing up.

Reverse Mortgages Gain in Popularity

Reverse mortgage originations have been brisk during this recession. The annual volume for reverse mortgages is around $17 billion, according to the NCLC report. Also, more lenders have jumped into the reverse mortgage market since the sub-prime market tanked. A Government Accountability Office report shows that of 2,700 reverse mortgage lenders, 1,500 made their first loan in 2008. While some folks have had success with using reverse home loans to boost their income stream and save their home, others have been taken by fraud or other deceptive practices.

“In the reverse mortgage market, seniors face some of the same aggressive lending practices that were common in the sub-prime lending boom,” according to Tara Twomey, an attorney for the NCLC and author of the report. “Well-funded marketing campaigns and perverse incentives to brokers are targeting seniors’ home equity and using reverse mortgages as their tools.”

How to Protect Yourself

Legislators have already responded to these issues and the most egregious practices like selling expensive annuities along with reverse mortgages is now illegal. You can also guard against fraud by talking with a HUD-approved reverse mortgage counselor to learn more about these products. Finally, shop around to compare loan packages from several reverse mortgage lenders since terms of loans can vary.

Reverse mortgages can be a useful tool for seniors who need extra income. But for someone who doesn’t plan to live in her home for long, a reverse mortgage could be mistake. Here’s why according to a recent US News and World Report article about reverse mortgages.

Cashing Out Your Home Equity

The big appeal of reverse home loans is that they allow you to convert home equity into cash. That’s a huge benefit in today’s turbulent economy because so many folks have taken significant hits to their retirement accounts and lost jobs. Money from a reverse mortgage can be the thing that helps you get through tough times and avoid losing your home.

Will You Leave Your Home Soon?

Take some time to investigate whether a reverse mortgage will be a help or hindrance. If you plan to use an HECM reverse mortgage to downsize, this could be a smart move. But some cases where a reverse mortgage may not be a good idea include:

• If you plan to move to an assisted living facility or nursing home
• If you plan to sell your home and move in with other family members
• If you think you won’t be able to keep up maintenance on your home
• If you don’t live in the house long enough to recoup the fees paid for the loan

Paying Off Your Mortgage Loan

Once you leave your home, the mortgage lender requires that the reverse mortgage be repaid. If you’ve spent most of the money you received from a reverse home loan you’ll have to come up with the cash or sell your home. Compare reverse mortgages to decide if getting one fits into your future financial plans.

Each year Money magazine comes out with its list of the best places to retire. This year’s list includes Port Charlotte, Fla., Palm Springs, Calif., and Pinehurst, N.C. If you find yourself fantasizing about moving to one of the towns on the best places to retire list, perhaps a reverse mortgage can help make your dream a reality.

How an HECM Can Help

The Department of Housing and Urban Development’s Home Equity Conversion Mortgage (HECM) allows homeowners age 62 and up to convert their home equity into cash. You can then take that money and use it for the purchase of a new home, as long as it will be your principal residence. Using the proceeds to buy a home can allow you to:

• Downsize to a smaller home.
• Relocate to a region that’s more affordable.
• Purchase a home that accommodates your physical needs.

What Types of Homes Can You Buy?

You can use a reverse mortgage to purchase an existing one- to four-family residence. However, if you dream of running your own bed and breakfast, you’ll have to find another way to purchase it since you cannot use a reverse mortgage loan for that purpose. You also cannot use a reverse mortgage loan to buy a boarding house, co-op, or manufactured home built before June 15, 1976.

Working with a Reverse Mortgage Lender

Even if you will be the sole mortgagor on your home purchase, your mortgage lender will check your spouse’s credit report, too. That’s because underwriters want to see what kind of financial obligations, debt, judgements, liens, etc. might affect your ability to get a clear title to the home. Make sure you and your spouse are prompt with providing any necessary documentation when asked. Get free quotes from reputable reverse mortgage lenders here.