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A reverse mortgage is a loan against your home that you don't have to repay as long as you live there. In a regular or so-called forward mortgage (15 year, 30-year, adjustable rate, and so on), your monthly loan repayments make your debt go down over time until you've paid it all off. Meanwhile, your equity is rising as you repay your mortgage and as your property value appreciates.
 | With a reverse mortgage, conversely, the lender sends you money and your debt grows larger and larger as you keep getting cash advances, make no repayment, and interest is added to the loan balance (the amount you owe). That's why reverse mortgages are called rising debt, falling equity loans. As your debt (the amount you owe) grows larger, your equity (that is, your home's value minus any debt against it) generally gets smaller. |
Here's another way to think of it. In a forward mortgage, you use debt to turn your income into equity. In a reverse mortgage, you use debt to turn your equity into income. You are reversing the deal you used to buy your home. Then, you had income and wanted equity. Now, you have equity and want income. In both cases, you use debt to turn what you have into what you want.
Reverse mortgages are different from regular home mortgages in two important respects:
- To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. With a reverse mortgage, however, you don't have to make monthly repayments. Thus, your income generally has nothing to do with getting a loan or determining the amount of the loan.
- With most home loans, you can lose your home if you fail to make your monthly repayments. With a reverse mortgage, however, you can't lose your home by failing to make monthly loan payments because you don't have any to make.
 | Good reverse mortgages merit your consideration if they fit your circumstances. A good reverse mortgage allows you to cost-effectively tap your home's equity and enhance your retirement income. If you have bills to pay, want to buy some new carpeting, need to paint your home, or simply feel like eating out and traveling more, a good reverse mortgage may be your salvation. |
How valid are common objections?
If you're like most older homeowners, you worked hard for many years to eliminate your mortgage so you'd own your home free and clear. After what you've gone through, the thought of reversing that process and rebuilding the debt owed on your home is troubling. Furthermore, reverse mortgages are a relatively new type of loan that few people understand. In addition, most of today's reverse mortgage borrowers are low-income, single seniors who have run out of other money for living expenses.
Can you lose your home?
Folks who don't fully understand reverse mortgages often have preconceived notions, mostly negative, about how these mortgages work. Seniors with home equity often erroneously think that taking a reverse mortgage may lead to being forced out of their homes or ending up owing more than the house is worth.
You won't be forced out of your home. Nor will you (or your heirs) end up owing more than your house is worth. Federal law defines reverse mortgages to be non-recourse loans, which simply means that the home's value is the only asset that can be tapped to pay the reverse mortgage debt balance. In the rare case when a home's value does drop below the amount owed on the reverse mortgage, the lender must absorb the loss.
Would a home equity loan or second mortgage work better?
Some people who are intimidated by having to understand reverse mortgages wonder whether it would be simpler to get a home equity loan or a new mortgage that allows them to take some equity out of their home. The problem with this strategy is that you have to begin paying traditional mortgage loans back soon after taking them out.
Suppose that you own a home worth $200,000 with no mortgage debt. You decide to take out a $100,000, 15-year mortgage at 8 percent interest. Although you will receive $100,000, you'll have to begin making monthly payments of $956. No problem you may think; I'll just invest my $100,000 and come out ahead. Wrong!
Most seniors gravitate toward safe bonds, which may yield in the neighborhood of 5 to 6 percent — a mere $416 to $500 of monthly income — far short of the amount you would need to cover your monthly mortgage payments. If you invest in stocks and earn the market average return of 10 percent per year, which is by no means guaranteed, your returns would amount to more — $833 per month — but still not nearly enough to cover your monthly mortgage payment. (You should also note that most income from stocks and bonds is taxable at both the federal and state level. By contrast, reverse mortgage payments you receive are not taxable.)
 | Here's another big drawback of taking out a traditional mortgage to supplement your retirement income. The longer you live in the house, the more likely you are to run out of money and begin missing loan payments because you drain your principal to supplement inadequate investment returns and cover your monthly loan payment. If that happens, unlike with a reverse mortgage, the lending institution may foreclose on your loan, and you can lose your property. |
Who can get a reverse mortgage?
Of course, reverse mortgages are not for everyone. In addition, not everyone qualifies to take out a reverse mortgage. Specifically, to be eligible for a reverse mortgage:
- You must own your home. As a rule, all of the owners must be at least 62 years old.
- Your home generally must be your principal residence — which means that you must live in it more than half the year.
- For the federally insured Home Equity Conversion Mortgage(HECM), your home must be a single-family property, a 2- to 4-unit building, or a federally approved condominium or planned unit development (PUD). For a Fannie Mae Home Keeper mortgage, you must have a single-family home or condominium. Reverse mortgage programs generally do not lend on mobile homes or cooperative apartments.
- If you have any debt against your home, you must either pay it off before getting a reverse mortgage or, as most borrowers do, use an immediate cash advance from the reverse mortgage to pay it off. If you don't pay off the debt beforehand or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.
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