The reverse mortgage industry would have you believe that the credit crisis has not been kind. While there is probably some truth to this notion, as falling home valuations have made it difficult and unattractive for many borrowers to obtain reverse mortgages, it has actually increased the attractiveness for other borrowers. Out of crisis comes opportunity.

While the first generation of reverse mortgage borrowers was sold despite falling house prices, the next generation of borrowers is signing up because of low home home prices. That’s because for many borrowers, it’s no longer attractive to continue paying money towards a mortgage that is currently worth less than what it was initially appraised for. Such borrowers are choosing to instead cut their losses, and basically giving up what little equity many of them have left.

Newspapers are rife with reports of borrowers who have either failed to or opted against refinancing, and instead chose to simply take out a reverse mortgage on their home. Think about it: if you are at/near retirement age with less than 50% equity in your current home, why would you continue to make payments knowing that there is a good chance that you will never be able to pay off the loan?

Many borrowers are using this same calculus to guide their decision-making. Especially those borrowers whose primary mortgages are of adjustable-rate (ARM) variety. Many of these borrowers have faced higher interest payments over the last year, and are desperately working with their lenders to achieve some kind of loan modification. Failure to secure modification (and many times, even despite modification) often directly leads to foreclosure.

For borrowers who meet the equity, age, and other eligibility requirements, a reverse mortgage certainly looks like an attractive alternative. And in some sense, it certainly is. Just remember that there is no such thing as a free lunch. In signing a reverse mortgage contract, you have basically traded the right to continue living in your home free of charge (excluding insurance and taxes) in exchange for the gradual erosion of whatever equity you might happen to have left at the time of signing. Depending on how home prices behave over the next couple decades, you (or your heirs) could very well be left with nothing when it comes time to sell your home.

Before you rush to find a reverse mortgage lender, then, consider that there is still another alternative to a reverse mortgage and foreclosure: downsizing into a less expensive house. In this age of optimism and trading-up, that’s a tough pill for many borrowers to swallow. Besides, some homeowners might have sentimental reasons for wanting to stay in their current homes. Just allow me to reiterate: the price for this luxury – and it is a luxury – is steep. By simply moving into a smaller home, you could end up debt-free and owning 100% of your house. What could be better?!

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