What Is A Reverse Mortgage?

For those over the age of 62 and who own at least 75% of the equity in their home, a reverse mortgage allows them to cash out the equity through the receipt of a monthly term payment or access to a line of credit to draw upon. In other words, the lender provides cash to the homeowner on a recurring basis and the interest is simply accrued over the lifetime of the loan. The loan's principle and interest do not need to be repaid until the home is sold or the owner has passed away.

Reverse mortgages provide a method for an aging homeowner to supplement their monthly income via their equity. This type of loan is non-taxable and will not be used in the calculation of Social Security and Medicare benefits either. The primary obligations of the homeowner are to simply maintain the home's value, insurance and of course, do not default on property tax payments.

There are three types of reverse mortgages available, all with their own advantages and disadvantages. These are:

1. Single Purpose Reverse Mortgages – Typically offered by state and local governments, these are low-cost loans available to low to moderate income homeowners. The use of the loan is for specific purposes, such as home repairs or for paying property taxes.

2. Home Equity Conversion Mortgages or HECM – These are federally insured loans backed by HUD. While more costly than other reverse mortgages, they are widely available, not limited to specific income requirements and may be used for any reason at all.

3. Proprietary Reverse Mortgages – Available through private lenders, the loans may be used for any purpose, but are generally associated with higher fees.

The actual amount of the loan itself will vary according to the borrower's age, appraised value of the home, interest rates and so on. Additionally, there are upfront costs to be considered, such as closing fees, property assessments, etc. The reversemortgage may include a monthly service fee as well ($25 to $35 per month). The interest is not tax-deductible until it is repaid.

When the loan ends (the home has been sold or the owner has passed away), it is usually repaid through the sale of the home. One important point to reverse mortgages is that the amount of the loan may not exceed the value of the home. This in turn means that if the sale of the home does not minimally earn enough to pay off the loan, the lender or insurer, the FHA in most cases, must absorb the loss.

This last part is what makes a reversemortgage so attractive to elderly homeowners. Regardless of the outcome, no debt from the loan is passed on to the estate and subsequently the heirs of the homeowner. When researched properly, with the consultation of a CPA and involvement of the immediate family, a reverse mortgage can be an exceptional vehicle for supplementing retirement income through the home's equity.