What is a reverse mortgage?

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Reverse mortgages are a type of loan, available to people 62 and older, which helps them cash into the equity in their home while they are still living in the home. The balances on reverse mortgages rise over time, and are only repaid to the lender when the borrower moves out of the house, sells it, or passes away.

Unfortunately reverse mortgages are often ripe for fraud and abuse. An excellent place to get addtiional information about reverse mortgages is the non-profit National Center for Home Equity Conversion at www.reverse.org.

Homeowners have several options for the equity payout of their reverse mortgage:

A lump sum

A line of credit

Monthly payments

A combination of these options.

The amount the borrower can borrow on a reverse mortgage is based on the borrower's age and the value of their home, ranging from 25% to 75% of the then current home equity.

The FHA, HECM and Fannie Mae HomeKeeper require independent counseling prior to application completion.

Advantages of Reverse Mortgages over using Home Equity or other type of loan include:

Reverse mortgages have no minimum income requirements. Even borrowers on a low or fixed income can qualify.

There is no danger that the borrower will have to repay more than the value of the home. This is true even if the borrower lives in the home longer than expected. (Provided the loan is structured for the life of the borrower.)

Disadvantages of Reverse Mortgages

They can be confusing. The concepts behind the reverse mortgage are somewhat different than the loans many people are used to. Someone considering a reverse mortgage should become familiar with the concepts and comfortable with them before signing up.

Reverse mortgages are generally more costly to set up than other types of loans.

Interest rates are generally higher, as are fees. Note that interest on a reverse mortgage accrues over the life of the loan, so if the loan is for an indefinite period, the interest cost will continue to grow.

The payments that a person receives from a reverse mortgage can affect their eligibility for public assistance programs, particularly Supplemental Social Security and Medicaid.