A reverse mortgage is a type of loan available to seniors (62 and over in the US), used as a way of converting their home equity (the value of the home, minus the amount of any existing mortgages) into one or more cash payments while retaining ownership of the property (continuing to live there) and avoiding monthly payments. Repayment of the loan is deferred until the borrower is no longer living in the home.

In a typical mortgage, a home owner pays a monthly amount (mostly interest, a little principal); after each payment, the owner has more equity in the house. After a certain amount of time (typically 30 years), the mortage will be paid off and the equity in the house will be equal to its value (it will be completely "owned"). In a reverse mortgage, the home owner pays nothing each month so that the owned share of the house actually decreases over time.

If a house gains significantly in value after a reverse mortgage is taken on it, it is possible to get a second and even third reverse mortgage to borrow against the increased equity that the owner now has in the more valuable house.

To qualify for a reverse mortgage in the United States, the borrower must be at least 62. The borrow must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. There are no minimum income or credit requirements, and for most reverse mortgages, the money can be used for any purpose. A pending bankruptcy that has not been finalized may, however, slow the process. Some types of dwellings, such as lower-value mobile homes, do not qualify. Before borrowing, applicants must seek HUD approved counseling.

Reverse mortgages are offered by some state and local governments. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes.

The majority of reverse mortgages are FHA insured.

The amount of money that an individual homeowner can receive from a reverse mortgage depends on their age, the Federal Housing Administration (FHA) or Fannie Mae (FNMA) appraised value of the home, and the starting interest rate (effective upon closing/finalization of the loan). The location of the home may also have an impact. There is also a type of reverse mortgage for homes valued over the maximum Fannie Mae limit.

In a reverse mortgage in the U.S., a borrower can be paid in a lump sum, monthly (payment of advances), through an increasing line of credit, or a combination of all three. The money received (loan advances) are not taxable and do not affect Social Security or Medicare benefits.

An American Bar Association guide explains that if you receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if their total liquid assets (cash, generally) is then greater than those programs allow.

The cost of getting a reverse mortgage from a private sector lender exceeds the costs of other types of mortgage loans from such a lender. There is an insurance premium of 2 percent of the loan and a 2 percent origination fee in addition to normal closing cost. Thus a $200,000 loan would have $10,000 in costs beyond the normal closing costs, which are typically some thousands of dollars. In addition, there is a monthly service charge of $30 that is deducted from the total amount of the loan (based on the estimated number of monthly payments that the loan is likely to have).

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well. But, as noted above, they often have restrictions, and many states don't have such programs at all.

The loan ends when either the homeowner dies or the homeowner moves out of the house (for example, to go into an assisted living home). At that point, the reverse mortgage is paid off by the proceeds of the sale of the house. If the proceeds exceed the loan amount, the owner of the house (if moving out) receives the difference; if the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance that the bank has, on the loan) makes up the difference.

The technical term for this cap on debt is "non-recourse limit." It means that the lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off.

*** This information is for informational purposes.  To find out details and if a reverse mortgage is right for you, please consult a mortgage specialist. ***