Financial Q&A: Reverse mortgages can work for many still paying off their homes

Q: I am 78 and have a 30-year, 6-1/8 percent interest mortgage with 10 years left on it. My income is from Social Security. I'm thinking of a reverse-interest mortgage. I owe $103,000 and my house is worth $220,000 to $250,000. My concern is that my daughter have something when I leave. Is there a difference in terms and interest in reverse mortgages? Which ones are considered the best?

M.B., Phoenix

A: While the good news is that you have built up substantial equity in your house, says financial planner Debra Neiman, author of "Money Without Matrimony," that overhanging mortgage most likely will disqualify you for a reverse mortgage.
In order to qualify, you generally must own your home outright, meaning that you have paid off any mortgages that use the house as collateral, she says.
But those who work in the reverse-mortgage industry disagree. Many reverse mortgages are used to first pay off existing liens on a homes, they say.

In some cases, applications are rejected if the existing mortgage is too high. But as long as applicants have enough equity in their homes to pay off the remaining loan amount, there is no problem doing a reverse mortgage.
“Many people with 50 percent equity in their homes qualify,” writes Karen Kennedy, a reverse mortgage specialist in Dallas, in an e-mail.
After the existing debt is paid off and closing costs, she says that you would still be eligible to receive a $86,000 lump sum, or $322 a month for life, she says.
Ms. Neiman gives this take on reverse mortgages: They're most appropriate for people over age 62 who are house rich and cash poor. The homeowner taps into the home's equity and receives a lump sum, periodic payments, or a credit line from the reverse-mortgage lender.
But the reverse mortgage is not paid back. Rather, the loan and interest are repaid when the last surviving borrower sells the home, permanently vacates the property, or dies.
There is no limitation on use of the funds. You could supplement your fixed income, pay medical costs, make gifts, or travel.
"Think of a reverse mortgage as an alternative to selling the house in order to raise cash," says Neiman.
The downside to the reverse mortgage is its up-front expense. Closing costs are generally higher than those of a conventional mortgage, Nieman says. So the economics make it more prudent only for people who plan to be in their homes for a long period of time.

[Editor's note: The original version of this story contained inaccurate information. Many homeowners with properties that have existing mortgage balances are eligible to receive reverse mortgages. The headline has been altered to reflect the changes made.]