Market Watch: Reverse Mortgages Reviewed.

• Author: Miller, Lance

A reverse mortgage can be a powerful financial tool when used properly as part of a comprehensive retirement plan. However, reverse mortgages are not without their disadvantages. Let's review the basics.

Reverse mortgages are available to borrowers age 62 and older who own their homes outright or have significant equity. A reverse mortgage allows borrowers to tap into their equity without being required to make principal and interest payments as long as they occupy the property as their primary residence. Borrowers may elect a lump sum distribution of a portion of the equity or may opt for monthly disbursements. The amount of equity available to borrowers depends on the value of the home as well as the age of the borrowers.

Because reverse mortgage borrowers are not obligated to repay the loan during their lifetime, borrowers do not need to demonstrate the ability to repay the mortgage. This makes income and credit qualification much simpler than with traditional mortgages. Reverse mortgage borrowers are required to continue to pay hazard insurance premiums, HOA dues, and property taxes.

Reverse mortgages often require significant closing costs, which are usually rolled into the loan amount. Reverse mortgages also carry an interest rate which determines the interest which accrues on any outstanding balance. Many...