Reverse Mortgages: "Loan Of Last Resort"

(CBS)  It's a last resort for many Americans who are strapped for cash, but reverse mortgages are a way to make ends meet for an increasing number of homeowners.

Early Show financial contributor Vera Gibbons appeared on The Early Show Monday to discuss the pros and cons of taking out a reverse mortgage.

A reverse mortgage, Gibbons explained, is a special type of loan where you're converting your home's equity into cash. Unlike a traditional mortgage where you're making payments to the lender, she said, the lender is making payments to you.

But the size of the payment, she said, depends on the equity in the home and the age of the application.

You get this money any number of ways, Gibbons told Early Show co-anchor Julie Chen. She said you can receive the money as a lump sum, in monthly installments, as a line of credit or a combination of these methods. Also, there is no repayment until you actually sell the home, move out or die.

But can anyone do it?

Gibbons said there are some requirements, such as you have to be 62 years of age or older. You also have to have a lot of equity in the home, she said.

In addition, you either have to own the home outright or have a small balance remaining on the mortgage.

Gibbons said about 10,000 reverse mortgages are being done each month, because homeowners need the cash.

"They've lost a lot of money in the stock market," she said. "...They need the cash infusion."

Gibbons said people who can't get a loan or refinance due to the credit crunch are finding their way around it with a reverse mortgage, which have no income requirements.

Gibbons said you can have no income and the credit requirements are minimal.

But these loans are very expensive, Gibbons explained. She said they can cost you up to 10 percent of the value of the home over the course of the loan in fees, from origination fees to appraisals to titles and insurance premiums.

"I think people could be overwhelmed by these fees," Gibbons said.

The reverse mortgage also doesn't permit you to leave your house to your heirs outright, she said. Also, you're still going to be responsible for property taxes and for the maintenance of the home.

If your heirs would like to have the home, Gibbons said, they would have to pick up the tab.

Gibbons said many seniors are funding their retirement with a reverse mortgage because they need the cash infusion.

"This is a loan of last resort," Gibbons said. "People have exhausted the options, and can't rent the house or sell it or downsize...so they're doing this."