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Reverse mortgages harder to get. Is one right for you?

Reverse mortgages granted in 2010 were down nearly a third from levels in 2009, due to stricter regulations and the housing slump. While some see reverse mortgages as a sophisticated tool, many say it's only a last resort.

By G. Jeffrey MacDonaldCorrespondent / June 22, 2011

In this Nov. 1, 2010 photo, Robin Miles stands outside her Baltimore home. About a year ago, Ms. Miles got a reverse mortgage on the three-bedroom Spanish-style house. Lenders made nearly a third fewer reverse mortgages in 2010 than in 2009, partly because of stricter regulations.

Steve Ruark/AP/File

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With a deluxe riverside home and a Mercedes SLK500 in the garage, Robert Watson of Grants Pass, Ore., defies stereotypes of cash-poor holders of reverse mortgages. He and his wife, both in their 70s, live comfortably on $3,000 per month. But he likes good deals, and he thinks he found one in a $280,000 loan that requires no monthly payments.

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"We lost $175,000 in the stock market, and with income from our investments reduced, we said, 'OK, let's do something,' " Mr. Watson says. "Now with this amount of money, we're set for life."

Reverse mortgages let people age 62 and older convert home equity to cash without making monthly payments. They're attracting fresh attention as new options – and new warnings – emerge, and as the number of reverse mortgages falls for the first time in years. Debate now centers on whether the product is a versatile tool to help seniors of various means – or only an option of last resort.

With a reverse mortgage, a homeowner receives a lump sum, an equity line of credit, or a monthly payment in exchange for equity in the property. Unlike with a home equity loan, the reverse mortgage borrower makes no payments until the property changes hands. When the owner dies or sells, the lender collects proceeds from the sale. Between 550,000 and 600,000 households in the United States have reverse mortgages through private- sector companies, according to the National Reverse Mortgage Lenders Association (NRMLA), an industry trade group.

The loan agreements can be complex, and options are expanding. Example: Homeowners may now choose a fixed rate rather than an adjustable rate, but the fixed rate applies only if they take their full loan amounts as a lump sum cash payment.

Another new option, termed a "saver" reverse mortgage, cuts upfront mortgage insurance premiums. By taking advantage of the saver, Watson paid $55 instead of $11,000 for mortgage insurance on his $550,000 home. Here again, though, there's a catch: The maximum amount one can borrow with a saver is 10 to 18 percent less than what's available through a standard reverse mortgage.

Many seniors welcome the prospect of breaking free from a monthly mortgage payment. A reverse mortgage can be a helpful tool for some of them, but they need to know the long-term consequences of using it, according to Barbara Stucki, vice president for home equity initiatives at the National Council on Aging, a nonprofit advocacy group based in Washington, D.C.

"People may have a false sense of security that somehow the mortgage is handled" with no payments due, Ms. Stucki says. "And it is – for today. But they're paying interest on that potentially large lump, and that [interest] is drawing down their equity. When it comes time for them to move, they may find there's nothing left."

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