Reverse Mortgages

by Elizabeth Rosen, Contributor

Reverse mortgage loans were first introduced in 1989 to allow senior citizens, aged 62 or older, to access a portion of their home equity without having to move. A reverse mortgage basically “reverses” the flow of payments, so that the lender is paying the borrower.

A reverse mortgage converts a percentage of your home’s equity into tax-free cash. Prior to the development of reverse mortgages, retirees seeking to withdraw that equity had to sell their house or take out a Home Equity Loan (HEL). There are conventional reverse mortgages as well as government-insured products (e.g., the FHA’s Home Equity Conversion Mortgage) available.

With a reverse mortgage, the lender makes payments to the borrower/homeowner based on a percentage of the accumulated equity in their house. You may choose to receive the money through installment payments (monthly, quarterly, or annually) or in one lump sum.

The typical amount for a reverse mortgage is based on 50% of the value of the home. Reverse mortgages are often used by retirees to supplement their income, help pay off debt accumulation, finance home improvements, or pay for health care expenses. However, a reverse mortgage can be used for any reason the borrower chooses.

To qualify for a reverse mortgage, you must be at least 62 years old and you must own a home. The amount of your reverse mortgage loan will depend on your age and the value of your home ― there are no income requirements. Note that you will also need to maintain your home and continue paying property taxes and homeowners insurance.

A reverse mortgage is repaid to the lender when the borrower passes away, permanently moves out, or sells the home. That means you do not have to repay the loan (or the interest that accrues) until you, or your surviving spouse, vacate the home. You (or your heirs) must pay back the loan by selling the home or using private cash funds. Any extra proceeds from the sale will go to you once the loan is repaid.