Owning your own home free and clear was once the American dream, but today many seniors are reversing the theme and using their paid-off home as collateral for a loan that pays them monthly.

The reverse mortgage is being billed as a helping hand for some seniors, sitting on a home rich with equity, but who also may be on a fixed income and facing rising health and medical costs, low returns from bank deposits and dismal stock portfolios.

"The biggest benefit to seniors is that, one, they don't have to have any debt service payments. Everything is deferred until they no longer reside in the house and then they have a period after that in which to repay [the loan]," says Victor Dhooge a loan officer with CalPacific Mortgage Consultants. He's been in real estate financing for 25 years and specializing in reverse mortgages for the past two years.

Dhooge says there are three different types of reverse mortgages that are available to seniors 62 years and older. If one spouse is under 62 years old, Dhooge says that the younger spouse would have to be taken off of the deed and covered in a trust instead. He says the Federal Housing Administration (FHA), Federal National Mortgage Association (Fannie Mae) and private lenders offer programs ranging from $290,000 to unlimited loan amounts depending on your home equity. All programs require homeowners to meet with a Department of Housing and Urban Development (HUD) approved counselor before initiating the loan to make certain this type of loan is appropriate for the homeowner.

Lenders look at the homeowner's age, amount of equity and interest rates to determine how much money can be borrowed. Yet another benefit for seniors is that, unlike a forward (regular) loan, there is no minimum credit score needed to get into the reverse mortgage.

"The only thing we look at is the equity in the home. They can have horrible credit, they could have come out of bankruptcy weeks ago, they could have virtually no assets and no income, it matters not," says Dhooge.

The reverse mortgage, however, must be the first lien on the property. If the home is not paid off, a portion of the reverse mortgage would be first used to pay off the current debt. Reverse mortgages cost about 3 percent of the loan, not counting the mandatory mortgage insurance, specific to the FHA programs.

Oceanside, Calif. resident, Peggy, who only wanted to be identified by her first name, capitalized on the reverse mortgage, "It's an excellent idea."

The extra income has made her life easier and more comfortable. She says the reverse mortgage makes sense, "I was in real estate so I realize property nowadays is three or five times worth what it was worth in the 70's, so you have a lot of equity."

Rather than having that equity locked up in her home, Peggy says she decided to put it to use, "It's really terrific for seniors. If you're alone -- a lot of people don't have relatives -- this way you can spend it on yourself."

But reverse mortgages, at one time, were considered backwards. Dhooge explains, "In years past you had some unscrupulous lenders out there where they would take a portion of the appreciation in the house -- future appreciation. I understand others, within the loan proceeds, would require that you bought an annuity from them."

Today, Dhooge says the industry is highly regulated and that kind of activity is absent from the programs.

Reverse mortgages could be a helpful tool for seniors, but it's important to realize the equity can be quickly drained. Careful consideration and expert advice help ensure a sound financial decision.

Published: January 24, 2005

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Phoebe is a writer, speaker, and author. She is the Director of Business Development for Quality Service Certification and a trainer in customer service for the real estate industry. She is a Realtor with The Guiltinan Group, a division of Prudential California Realty. Her articles, feature stories, and columns appear in various publications including The Coast News, Del Mar Village Voice, and Rancho Santa Fe Review in San Diego. Phoebe worked for KGTV/10News in San Diego as a Newscaster, Reporter and Community Affairs Specialist for more than a decade. Phoebe's writing is also featured in Donald Trump's book: The Best Real Estate Advice I Ever Received. She is the author of If the Trash Stinks, TAKE IT OUT!: 14 Worriless Principles for Your Success. Contact Phoebe at 858.259.3646 or . Visit PhoebeChongchua.com for more information.