This is a special loan product available only to older individuals that enables them to convert the equity in their home to cash for such items as in-home health care, living expenses, home improvements, or other needs.  It also enables them to maintain or improve their standard of living and/or supplement their retirement income without taking on a monthly mortgage payment. 

A reverse mortgage differs from a home equity loan or line of credit because these types of traditional loan products require applicants to [1] meet certain income and credit requirements and, [2] immediately begin monthly repayments, [3] allow pre-existing mortgages, and [4] there is no borrower age restriction. 

Highlights of a Reverse Equity Mortgage

• Limited to borrowers 62 years or older
• The home must be owned free and clear of debt 
• No tax liens can exist
• Borrower payment options include:
  • A lump-sum payment
  • Fixed monthly payments for life
  • Line of credit
  • Fixed monthly payments for a finite time period
  • Some combination of monthly payments and a line of credit
• The interest rate charged is usually an adjustable rate that changes monthly or yearly although the size of monthly payments received does not change
• Can be used to purchase an annuity that will assure continued monthly income even after the home is sold
• Seniors do not have to meet income or credit requirements to qualify 

What Determines the Amount of a Reverse Mortgage?

The size of a reverse mortgage that a senior homeowner may receive depends on the:

• type of reverse mortgage
• borrower's age and current interest rates, 
• the home's property value and, 
• projected life expectancy of the homeowner

The older the applicant, the larger the monthly payments will be to the individual. 

Repayment of a Reverse Mortgage

A reverse mortgage does not require monthly repayments to the lender.  It becomes repayable when [1] the borrower no longer occupies the home as his or her principal residence, or [2] the sole remaining borrower dies, [3] the home is sold, or [4] the borrower moves out of the home or into a nursing home.

The repayment amount that comes due when any of the above occurs includes: [1] the principal balance of the loan, [2] any accrued interest, and [3] finance charges paid for through the mortgage. The total repayment obligation however, cannot exceed the value of the home.

The loan may be repaid anytime by the borrower or his/her family or estate.  When the home is sold, any excess funds go to the borrower or his/her estate. If the sales proceeds are less than the amount owed, insurance or some other party will usually cover the difference and the homeowner is not responsible.  Generally, as long as the borrower occupies the home, he/she cannot be forced to sell to repay the reverse mortgage even if the total of the monthly payments exceeds the value of the home.

The first, most widely available reverse mortgage in the United States was the federally-insured Home Equity Conversion Mortgage (HECM), authorized in 1987.