Try and picture a scenario in which a mortgage company sends you a check every month rather than you sending them a check. This is exactly what you get when you take out a reverse mortgage. Reverse mortgages are gaining in popularity because of increased life expectancies, higher medical costs and the downturn of the stock market over the past few years.

Reverse Mortgages
A reverse mortgage is a special type of loan that lets a homeowner, 62 years of age or older, convert the equity in their home into cash without having to sell their home or give up the title. The home can be one of the largest assets a senior owns, and a reverse mortgage allows individuals to access that capital as an income stream without having to vacate the property. "A lot of people are in more of a financial bind than they thought they would be in, at this age, because they're not getting as high a return on their investments, and their expenses are higher than they anticipated. These are the type of conditions that create demand for reverse mortgages," says Mike Broderick, a reverse mortgage specialist at Seattle Mortgage Company. Reverse mortgages are for house rich, cash poor people who own their own home and want to convert the equity they have built in that home into readily available cash. Rather than requiring the borrower to make payments to a lender each month, as with a typical forward mortgage or home-equity loan, a reverse mortgage pays cash to the borrower. The amount a borrower can access typically depends on their age, the type of reverse mortgage, prevailing interest rates, location of the residence and the value of the home. Borrowers typically have several means of accessing their capital: in a lump sum, via fixed monthly payments, through a line of credit or a combination of these options.

Most reverse mortgages have five payment options:

Tenure
Borrowers receive equal monthly payments for as long as at least one borrower lives and continues to occupy the property as a principle residence.

Term
Borrowers receive equal monthly payments for a fixed period of months.

Line of Credit
This method provides borrowers cash on demand, at the borrowers discretion until credit is exhausted.

Modified Tenure
This method combines a line of credit with monthly cash payments for as long as the borrower remains in the home and credit is not exhausted.

Modified Term
This method combines a line of credit with monthly payments for a fixed period specified by the borrower.

Most reverse mortgages do not require any repayment of principal, interest or servicing fees for as long as the borrower lives in the home. However, the borrower remains responsible for real estate taxes, insurance, utilities, repairs and maintenance. Cash accessed via a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid.

The Reverse Mortgage Market
The Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development, spawned the U.S. market for reverse mortgages in 1987 when it unveiled the Home Equity Conversion Mortgage (HECM) as part of a reverse mortgage pilot program.

More than 720,000 reverse mortgages have been taken out in the United States since 1987, according to the National Reverse Mortgage Lenders Association in Washington D.C.

Fees
Reverse mortgages come with potentially steep origination fees, upfront mortgage insurance premiums, appraisal fees and other standard closing costs. Just like traditional mortgages, these fees can be financed as part of the loan.

The Bottom Line
Reverse mortgages may not be for everyone. Individuals that do not have liquidity problems or who want to leave their primary residence to their children should not use a reverse mortgage. But for those individuals who are in a cash crunch and either do not have children or want to rely on their children to provide them with a secure retirement, tapping the equity in your home to increase your cash flow in retirement may make sense.

Be sure to do your research before applying for a reverse mortgage. You may obtain information regarding reverse mortgages from Fannie Mae, AARP and the National Reverse Mortgage Lenders Association in Washington D.C.

Related Articles
  1. Savings

    Top 10 Tips For A Financially Safe Retirement

    You've worked hard to secure enough to retire, so make sure you keep it safe.
  2. Retirement

    Retire Independently In A Retirement Community

    Naturally occurring retirement communities can provide a place for retirees to live independent, social lives.
  3. Retirement

    Journey Through The 6 Stages Of Retirement

    Financial planning is important, but emotional planning is the key to retiree bliss.
  4. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  5. Retirement

    The World's Most Luxurious Retirement Destinations

    If money is no object (or if you would just like to dream), these five spots are the crème de la crème.
  6. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  7. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  8. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  9. Professionals

    Top Social Security Issues for Divorced Women

    What female divorcees need to know about the twists and turns of figuring out Social Security benefits.
  10. Retirement

    Maxing Out Your 401(k) Is Profitable: Here's Why

    It's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
RELATED TERMS
  1. Proprietary Reverse Mortgage

    A loan that lets senior homeowners retrieve the equity in their ...
  2. Single-Purpose Reverse Mortgage

    A financial tool that lets senior homeowners retrieve some of ...
  3. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  4. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  5. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  6. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  4. Is the Social Security administration part of the executive branch?

    The U.S. Social Security Administration, or SSA, is an independent government agency under the purview of the executive branch. ... Read Full Answer >>
  5. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>
  6. How are Social Security benefits calculated for divorced spouse?

    The maximum Social Security retirement benefit payable to a divorced spouse is 50% of the amount that would be paid to the ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!