pricespector

The banks don't know whether the home value will decrease or rise. They play the odds. However, the beginning vlaue for calculation purposes is "fair market" and is not devalued. In fact, banks that had written reverse mortages prior to the real estate collapse are really getting hurt by them and the homeowner is the winner thusfar.

Yet, the lump sum equivalent that the bank will put into motion is discounted from the fair market estimate. So, a house that has a fair market value of $200,000 may allow a $140,000 lump sum never to be paid back prior to the occupants death. The amount owed to the bank can never exceed the original $200,000 appraisal though. In other words, there is a cap on the debt regardless of interest rates, makret conditions, etc.

Much like a lifetime income annuity, reverse mortgages can also pay a guaranteed income stream for life regardless how long the recipient lives. Thus, the longer you live and receive payments, the better the deal. It is no coincidence that the $140,000 lump sum mentioned earlier would buy a commercial lifetime annuity that equals the monthly payout of a reverse mortage of the same size.

HELOCs do not shelter the homeowner from these risks at all. Although they are more flexible and COULD be cheaper in the short term, lack of refinancing options as one ages (mortality tables) and interest rate fluctuations, you could end up paying more in the end without the guarantees of the lifetime income and debt cap that a reverse mortage provides. The other disadvantage of a HELOC is of course...the payments. The payment requirement alone hinders the maximum guaranteed income you can receive from the equity in your home.

To sum it up, over the long term a reverse mortgage offers more guarantees, higher income and a debt cap.

Over the short course, the HELOC would likely be a better option.

Neither option is the best for everyone, the idea being that we should prepare for our retirements that enable us to live as we desire without tapping equity. Unfortunately, given the economy and the corresponding crushing blow to marginal retirement accounts, we may see reverse mortages become more popular with banks, and more attractive to consumers.