You've probably seen the commercials: Actors tell older adults that they can use a reverse mortgage to access the equity in their homes and live a more financially carefree lifestyle. They say the reverse mortgage will eliminate seniors' monthly mortgage payments, freeing up that money for other expenses.
Sounds simple, right?
Reverse mortgages are loans available to homeowners age 62 and older that allow them to borrow money based on the value of their homes. Unlike other kinds of loans, borrowers don't have to pay back the debt immediately, instead deferring payment until they move out of the home or pass away -- in which case the payment will be taken from their estate or sale of the home.
While the government doesn't provide the loans, the Federal Housing Authority (FHA) oversees the Home Equity Conversion Mortgage (HECM) program. The FHA insures reverse mortgages so that lenders can recoup their entire investment, even if the home's sale value is less than the balance of the loan.
A 2015 study by the Consumer Financial Protection Bureau found that consumers who saw TV ads for reverse mortgages had a number of misconceptions about what the loans are and how they work, and news stories about people who got in over their heads and lost their homes are all too common.
However, reverse mortgages can be a helpful tool when used in a well thought out financial plan for seniors, said Sandy Jolley, a reverse mortgage suitability and abuse consultant from Oxnard Shores, California.
"It should be part -- but not all -- of your financial strategy," Jolley said. "I tell people to look at four things: Your financial strategy, your health requirements, your financial security through retirement and your estate wishes. If people look at the consequences of a reverse mortgage on those things and those consequences are acceptable, then a reverse mortgage might be right for them."
Could a reverse mortgage be a way for you to improve your financial situation in retirement? Click ahead to learn how these loans work.