Doesn't it seem like every time you turn on your television or open your newspaper, you see an advertisement for a new financial product? The industry is constantly hard at work coming up with new ways to help you manage your money, boost your income and invest more.
A good chunk of these new products fall flat. But every once in a while, one will take hold in a way that even the experts didn't see coming. To me, that means it's time to look under the hood, kick the tires and really get a sense of whether that particular product is for you before you buy into all the hype. These days, that hype is about reverse mortgages.
Designed for people 62 and over, these mortgages — which in fact aren't all that new, but have just recently taken off — enable you to have a bank buy back your home while you're still living in it. It provides an income that you can opt to receive in a lump sum, a monthly payment or a line of credit that you draw upon when necessary. Sounds kind of like winning the lottery, right? Not quite. You have to pay the money back (plus interest) when you vacate or sell the home, and there are fees involved. Still, these mortgages do have a place, and they're rapidly finding it: According to a recent report by the AARP, while only about 1 percent of older homeowners have a reverse mortgage, there were 107,000 loans made in 2007 compared to only 6,600 in 2000.
Here's what you need to consider before you (or your parents) join the reverse-mortgage frenzy:
Your age. These mortgages aren't for everyone, but the older you are, the more likely you are to benefit from one. For one, you probably have more equity in your home. But the other reason is this: Banks calculate the payout based on not only the value of your home, but your age and average expected length of life.
"If you're 75, you could get a much more adequate stream of income than if you're 65. That's because the bank would estimate that if they're starting to pay at 65, they'll have to pay for a longer period of time," explains John Rother, group executive officer of policy and strategy for AARP.
Your situation. A reverse mortgage probably isn't for you if you're not planning to stay in your home for a long time, so consider that upfront. Then think about other factors related to both your current and future lifestyle. People get these loans for a variety of reasons, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Some do it to finance an active lifestyle in their retirement, others because the home needs to be repaired or updated with health care equipment.
"Let's take a 75-year-old widow who's lived in this home for some time, but it needs substantial repairs. If she doesn't have any other way of financing those, then a reverse mortgage might be an appropriate way for her to stay in the home, keep it in good shape, and continue to enjoy it," explains Rother.
Note: If you're hanging on to this home not for your own pleasure or comfort, but because you think your children will want to live in it some day, have a discussion to make sure that's the case. If it's not, consider downsizing to something smaller and more manageable.
The alternatives. As I mentioned, one might be moving into a smaller, less-expensive home or cutting back on your expenses. But if you've made all possible cuts to your budget and still need some extra income, do some research into benefit programs you may be eligible for, either from your state, the federal government or your former employer. You can also look into a home equity loan or line of credit, depending on if you need the lump sum or just want to have some money available in case of an emergency. The one silver lining of the probable recession is lower interest rates. HELOCs are more attractive today than they've been in two and a half years.
The fees and interest rate. These mortgages are paid back when the home is sold, typically as a result of the borrower moving or passing away. The fees, also paid at that time, tend to be higher than those associated with a traditional mortgage. Bell says the exact figures vary by product, but typically average 5 percent of the home's value.
"When they sell, what they owe is the sum of the funds that have been advanced, the fees that were associated with the loan, and any interest that was accrued on it. But that's capped by the value of the house," explains Bell. If the amount owed is more than the value of the house, the lender eats the difference. If it's less, you (or your heirs) keep the change.
The lender. There aren't a ton of banks out there offering reverse mortgages, but you still need to make sure you work with a reputable one. First thing to know? By law you're required to seek independent counseling before you sign on the dotted line. Your bank should give you a list of counselors in your area who can help you sort through the nitty-gritty and determine if the lender — and this product — is right for you.
If you decide to seal the deal, stick to what you came for. Lenders may try to layer on other products, like long-term care insurance or annuities, that you just don't need. The presence of this practice was among the findings of the AARP survey, says Rother. "With any mortgage you'll be pitched a home warranty, home repair services, maybe health insurance or financial accounts. Some are quite legitimate and others are not." As a consumer, it can be hard to make the distinction, which is why a third-party counseling service is so important.
With reporting by Arielle McGowen.
Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .