Reverse mortgage tool to aid senior finances - Popularity increasing as awareness grows

You're retired. You've worked your whole life to have a paid for house where you could enjoy your golden years. But now rapidly-piling up medical bills and your aging, broken down car have put the pinch on your pocketbook. What do you do?

It's a question that is becoming increasingly common, according to University of Missouri St. Louis professor of finance Ed Lawrence, as baby boomers hit their retirement years. And that's why reverse mortgages are becoming increasingly popular.

"I have always loved reverse mortgages as a financial tool," Lawrence said. "In theory they're a really good product: You use the equity you have in your home to increase your monthly income or to pay for things you need, then you don't have to pay it back as long as you live in your house."

Lawrence said you could make repairs to your house, have more money to pay for regular bills -- or use it to take a vacation.

Joy Paeth, chief executive officer of the Area Agency on Aging in Belleville, said seniors need to beware before they sign away their house for the quick cash of a reverse mortgage.

"A senior has to be really cautious in making that decision," Paeth said about the choice to take equity out of a home that is paid for or nearly paid for. "Sometimes it might not turn out the way they would like it to. Sometimes it might be the only option a person has. But you have to be careful that you don't lose your house in the deal."

While there are undoubtedly shady loan companies out there who would love to make a quick buck by swindling a senior citizen out of the family homestead, Lawrence said people who do their homework have little to fear.

"Because they won't be getting any payments for a while, interest rates on a reverse mortgage aren't as good as they are on other types of home loans," Lawrence said. "But as long as you shop around and avoid excessive fees and interest rates, there is virtually no chance you can burn up all of your equity and be forced to sell your house."

Lawrence said lenders will not loan an amount of money on the house that will even approach the amount of equity available in their house out of fear that they won't get their money back.

To make sure you stay safe, Lawrence recommends that seniors check out the rates of at least three lenders before they sign on the dotted line.

"Shop around for the best interest rates and the lowest closing costs and other fees," Lawrence said. "Check with banks and mortgage brokers before you make a decision."

One of the biggest taboos about the concept of the reverse mortgage is that seniors fear letting down their heirs by spending their inheritance.

"There is a very good chance the appreciation of the value of a house will offset the money they are taking out in equity," Lawrence said. "Over a 20-year period of time, the value of a house could double or even more, easily replacing the money that was borrowed in a reverse mortgage."

On the other hand, if your parents' house needs a new roof and you can't afford to pay for it otherwise, you might actually be saving money by taking out a reverse mortgage, Lawrence said.

"If you don't make the necessary repairs and a house's condition deteriorates, it will be worth less to the people you leave it to," Lawrence said.

While reverse mortgages have been around for more than 30 years, seniors are often reluctant to dip into the equity in their house -- especially if it is completely paid off -- Lawrence said. But people need to break the just say no mentality.

"We hear stories all the time about senior citizens giving up their medication because they can't afford to buy it," Lawrence said. "They finally broke down and got a reverse mortgage, and they talk about how it saved their lives."