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In comparing these two loan products, there are several factors to consider. For some, the option Arm would be like a ticking time bomb – it is only a matter of time before the low monthly mortgage payment would be replaced by a large monthly payment. If the senior does not have an abundance of income and wants to stay in their home for many years to come, then the option ARM would be a poor choice. On the other hand, the reverse mortgage carries the guarantee of no mortgage payments for as long as the homeowner lives in the home.

Qualifying for the reverse mortgage is much easier than qualifying for the option ARM. The reverse mortgage does not require any income, assets (other than home equity) or minimum credit score. The option ARM does require those items, even if they only must be “stated” on the forms by the borrower. Caution: never consider lying about the amount of income or assets. Despite what an eager broker might say, such an action carries potential loan-fraud consequences.

Coming up, Part 5

This is post one of a series.

There are two surprisingly similar home mortgage options that seniors can consider to tap into their home equity: the reverse mortgage and the option ARM. The option-ARM has been frequently used by seniors to take cash out of their home equity since monthly payment amounts are much less than those of the traditional 30 years fixed rate mortgages for the same loan amount. Another popular solution is the reverse mortgage which is designed for the same purpose, but conveniently requires no monthly principal or interest payments. So given the similar function of these loans, the question becomes, which loan is better for seniors, the reverse mortgage or the Option ARM?

We'll dive into the topic in the next post.

A recent news story found here states that reverse mortgages should be a last resort, not a “ticket to the resort”. This attitude toward this relatively new mortgage loan is not uncommon. But this is an opinion, not a fact, and everyone is entitled to their own opinion. Here is mine.

By saying that a reverse mortgage is a loan of last resort, it implies that it is a poor choice and you should do anything to avoid it. I say that depends on your goals. Since the reverse mortgage allows you to use a portion of your home equity, the question to ask yourself is whether or not that tradeoff is worth it to you.

Using your home equity means you will have less of it in the future. If you plan to sell your home, take the money and move, then you must decide if there will be enough left over for your purposes. Or it may be more important to you that your heirs get the maximum amount of money possible. In these cases, the reverse mortgage may not be the best choice for you.

For others who want to stay in their homes for the rest of their lives, using some of the equity with a reverse mortgage may be a good choice. Their heirs may get along just fine with whatever home equity is left over, since the reverse mortgage rarely allows you to use all of it. Ask your reverse mortgage lender for an Amortization Table to project how much equity will remain in your case.

Knowing these tradeoffs may help you evaluate the relative benefit of a reverse mortgage. The question to ask yourself, is whether having extra cash for any purpose and the guarantee of no payments is worth the tradeoffs to you.

If you need funds for medical expenses, then you will probably consider Medicare as a financial resource in lieu of a reverse mortgage.

If you are 65 years or older your probably already have Medicare. Medicare is a god-send for many people! There are however, some significant holes, especially with the recent reforms that affect people who spend a lot of money on medications. These and other gaps in Medicare coverage can sometimes be covered by Medicare Supplemental plans or with a reverse mortgage.

If nursing home care is needed, Medicare will cover the cost only if the senior went to a skilled-nursing home (not assisted living) directly from the hospital, will be staying longer than three days, and requires ongoing skilled-care that was prescribed by her doctor. Even then, Medicare covers all nursing home care costs for only 20 days, and supplements them for no more than 100 days. It does not cover non-medical care such as assisted living and in-home care. If you need those services, they will cost tens of thousands each year, so you should seriously consider a reverse mortgage. For more information see http://www.medicare.gov/Nursing/Payment.asp