A reverse mortgage is a special type of home loan that lets a homeowner convert their home equity into cash. The lender will loan you a portion of your home equity built up over years you have owned your home. A reverse mortgage is unique in that no repayment is required until the homeowner(s) no longer use the home as their principal residence. You can choose to take all of the loan in one lump sum, as a regular monthly payment or like a line of credit to use when you need it. With most reverse mortgages, the money can be used for any purpose (as long as any previous mortgage(s) are paid off.
Reverse mortgages are available only to borrowers at least 62 years of age who are able to pay off any existing mortgage(s) with the proceeds of a reverse mortgage (and additional personal funds if needed). The amount you may borrow depends on the borrower's age, the Federal Housing Administration (FHA) appraised value of the property and the starting interest rate at the time of closing. The FHA offers a Home Equity Conversion Mortgage (HECM) that is insured by the Federal Housing Administration -- the federal government. Some state and local governments offer reverse mortgages. Often state or local reverse mortgages limit how you can spend the money, for example some only allow you to spend it on home repairs.
Reverse mortgages allow the home owner to continue living in their home, and allows repayment of the loan to be deferred until the borrower is no longer living in the home. In most cases, the loan advance is not taxable and does not affect Social Security payments or Medicare benefits. Medicaid and SSI benefits may be affected.
Reverse mortgages are also different from conventional mortgages because lenders do not consider the borrower's credit rating when approving reverse mortgages.
Reverse mortgages can be expensive compared to other types of loans. If you take the loan advance in a lump sum, often the value of your house does not grow as fast as the interest builds up on the loan. However, the cost of the loan may be less expensive than the cost of selling your home and relocating.
The Housing Counseling Clearinghouse has information on HUD-approved counseling agencies throughout the country and you can search for an FHA approved lender here. You can also phone HUD at (800) 569-4287 to locate counselors and lenders.
Reverse mortgages provide seniors who own their homes with important options. But, be sure you understand the requirements of the loan before you sign. Consult your attorney and/or tax advisor.