Reverse mortgage could help senior's finances

If anything defies the adage "if it sounds too good to be true, it probably is," something called a reverse mortgage might be it - especially for older homeowners who find themselves struggling financially while sitting on a big pile of home equity.

A reverse mortgage allows older homeowners to tap into the equity in their homes without having to sell the house. If you own your home and are at least 62, a reverse mortgage might allow you to get your hands on that equity and continue to live in the home with no requirement to repay the loan as long as you stay there.

You will receive either a lump sum or monthly payments tax-free for as long you live in the home, and you pay the taxes and keep it in good repair.

When you die or leave your home for good, the loan becomes due. The home may be sold, and any remaining equity belongs to you or your heirs.

If the heirs wish to keep the home, they may take out a conventional mortgage or repay the reverse mortgage.

Requirements for private reverse mortgages vary, but most programs have a minimum age requirement, and you must own the home outright or have a mortgage small enough to be paid off by the reverse mortgage.

A reverse mortgage can be made only on the homeowner's primary residence, and the home must meet certain minimum property standards established by the Federal Housing Administration.

With no income requirements and few credit requirements for a reverse mortgage, people with less-than-perfect credit generally can qualify.

While a reverse mortgage has many benefits, there also are a few drawbacks to be considered.

The single biggest objection for most people is the cost of the reverse mortgage, typically 5 percent for an FHA-insured reverse mortgage. If the home's value is under $100,000, the percentage might be even higher.

On top of that are mortgage-insurance premiums, a hefty loan origination fee and standard closing costs.

However, all of these costs are built into the loan and are reflected in higher interest rates.

Because reverse mortgages are government-insured loans, taking them out can be time-consuming. The paperwork can be daunting and confusing because of the required disclosures covering everything from rates to privacy.

It is not a simple process. But the process may be well worth the effort and provide the perfect solution for seniors who live in constant fear of running out of money and being forced to give up their independence.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.