Have you seen the ads lately for "reverse mortgages"? Have you wondered what they are? They sounded pretty suspicious to me, so I did a little searching.

At first glance, I thought I was seeing the reincarnation of the interest only loan as a "not even interest loan", but (while that is essentially what it is) further reading revealed that it's not quite as bad as I first thought...at least not quite. What I have the biggest problem with is how they're being marketed.

So, what is a "reverse mortgage"?

Essentially (disclaimer: if I'm reading the information correctly -- don't take my word for it), a reverse mortgage is a home equity loan that you don't make payments on till you no longer live in the home (ie. move or die). If that were all there was to it, they'd be Satan's plan for the destruction of the world, but there are some rules that save them from being a one way ticket to purgatory.

1) They're only available to people 62 and older.

2) You have to pay off your existing mortgage, if any, at closing (ie. if you have an existing mortgage, you're refinancing with the reverse mortgage...yuck, I can't stand using that name -- I'm going to call them NEILs instead -- that is, as I said above, "not even interest loan").

3) You have to live in the home (so you can't use these to build a real estate empire and pull the economy into the river Styx with you when the housing market goes south).

4) I'm not 100% sure on this one, but it sounds like if, when you...no longer live in the house, the value of the house is less than the total owed (because of the interest that's been accruing), the worst that can happen is that you lose the house -- nothing more need be repaid. And I think they limit how much you can borrow based on your age (ie. how long they expect you'll be accruing interest) to reduce the risk of this happening.

5) You can receive the money in equal monthly payments, which would reduce the probability of someone getting the loan, blowing all the money, and being left with nothing. There are other ways of getting the money too, so they don't protect people completely from making dumb decisions.

In the end, NEILs look to me like a way to spend your equity yourself rather than passing it on to your heirs. I guess I can't fault someone for wanting to do that. And for people who don't have heirs, I suppose it's not a bad idea, since it's put together in a way that ensures you can't be foreclosed on (as long as you keep up on taxes and insurance).

The things that bug me are, first, the name "reverse mortgage" -- it's a convoluted term that seems calculated to sound better than what it really is. And second, NEILs are touted as a way to get money from your home while still owning it. If you don't have equity, all that home ownership means is that you're responsible to pay the property taxes.

As long as it's made clear to the borrower that this is a way to spend their equity rather than pass it on, I guess it sounds okay.