As the foreclosure crisis continues unabated, experts continue to trawl for solutions. There are mortgage modifications and principal write-downs. Some have called for a national foreclosure moratorium. States are loaning unemployed borrowers money so that they can continue making mortgage payments. Borrowers are suing lenders in a last-ditch attempt to avoid foreclosure. I’d like to add another potential solution to the list: reverse mortgages.

For those that are struggling to make payments on their primary mortgage and/or are facing foreclosure, a reverse mortgage would seem to represent an ideal fix. Under a reverse mortgage, you can cease making monthly payments immediately, and you are entitled to stay in your home until you pass away, as long as you continue paying property taxes and hazard insurance premiums.

However, there are a few stipulations. First, you must be older than 62 years old in order to obtain a reverse mortgage, which means that only a small portion of mortgage borrowers are even eligible. In addition, your home equity must exceed a certain percentage in order to be eligible (the exact percentage depends on your age and interest rates). That’s because the entire primary mortgage must be paid off upon obtaining a reverse mortgage as well as because the FHA limits the proportion of your property value that you can borrow against. Finally, since a substantial portion of the reverse mortgage proceeds are probably being used to retire your primary mortgage, your cash position probably won’t improve much. Given that your home equity will also decline over time, it is imperative that you have savings and other sources of cash that you can use to continue supporting yourself.

When contemplating using a reverse mortgage to repay your primary mortgage, it’s important to remember that you are merely swapping one form of debt for another. In other words, the reverse mortgage – just like the primary mortgage – ultimately needs to be repaid. The advantage is that you can repay the loan from the sale of your home (following the death of the primary borrower) and can continue to reside in the home in the interim. The disadvantage is that because reverse mortgages are always negatively amortizing (i.e interest compounds on top of interest), you might end up owing more over the life of the loan than if you had merely continued to make monthly payments on your primary mortgage.

In short, reverse mortgages are really most appropriate for borrowers that are having difficulty making monthly payments for their primary mortgages and that are opposed (for whatever reason) to moving into a less expensive home.