New rules could make reverse mortgages safer. Should you shore up your retirement with one?
The reverse mortgage has long been viewed as a last resort for older Americans with home equity but little cash. Now it's poised to become a mainstream financial strategy -- at least that's what regulators and financial services firms are hoping. But you should be cautious about jumping in.
First, the basics: A reverse mortgage lets you borrow against your home equity once you hit 62. The loan, which can be taken as a lump sum, lifetime payments, or a line of credit, doesn't have to be repaid until you move or die.
Unfortunately, these mortgages have been riddled with problems -- in particular, misleading marketing and inappropriate lending, a 2012 Consumer Financial Protection Bureau report found.
In response, new federal rules recently went into effect. The reforms generally reduce how much of your home's value you can borrow, among other things, and require lenders to make sure that borrowers can cover upkeep.
Financial services companies are also aiming to make these loans more appealing. "Home equity is key to Americans' retirement security, so it's crucial to responsibly offer reverse mortgages," says Christopher Mayer, a Columbia Business School professor and CEO of Longbridge Financial, a startup reverse-mortgage lender that plans to provide broader financial advice too. Boston College professor and retirement security advocate Alicia Munnell is on its board.
Some advisers are touting reverse mortgages as standby credit. Unlike home-equity lines of credit, which can be frozen during a financial crisis, reverse mortgages stay open. Left untapped, your credit line will grow each year by the interest rate you can be charged. "It's a great way to build a hedge against future needs," says Coral Gables, Fla., financial planner Harold Evensky, who co-authored a recent study on these loans.
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