What Is A Reverse Mortgage? (Part 1)
A 12 Part Series

Part 1 - Definition of a Reverse Mortgage

A reverse mortgage is a Home Equity Conversion Mortgage (HECM) - it's a special type of home loan that allows senior citizens to convert a portion of the equity in their homes into cash. Reverse mortgages are offered through the FHA (Federal Housing Administration), and is available only to homeowners or home buyers aged 62 or older.

A reverse mortgage is a safe plan that can give older Americans greater financial security. The equity that has built up in their homes over years can be paid to senior citizens. Because they are being paid from the equity in their homes, senior citizens can use the cash for whatever purpose they want. Many seniors use it to supplement social security and retirement benefits, meet unexpected medical expenses and daily living expenses, make home improvements, travel, and more.

A reverse mortgage is often used to fully pay off an existing home mortgage and thereby allow Seniors to cease making monthly mortgage payments. And, unlike a traditional home equity loan or second mortgage, no repayment is required on a reverse mortgage until the borrower(s) no longer use the home as their principal residence.

Seniors can also use a reverse mortgage to purchase a primary residence if they have cash on hand or have proceeds from the sale of another home. The cash on hand is used to pay the difference between the proceeds or a reverse mortgage and the sales price plus closing costs for the property they are purchasing.

The maximum available loan amount is a percentage of the home's value that is based on the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property, sells the home, or passes away. At that time, the estate has 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. The estate initially has 6 months, but up to 2 3-month extensions can be granted. All remaining equity is inherited by the estate. And, the estate is not liable if the home sells for less than the balance of the reverse mortgage.

Difference Between a Home Equity Loan and a Reverse Mortgage

With a traditional second mortgage or a home equity line of credit (HELOC), you must have sufficient income, credit and equity in the home to qualify for the loan. You are also required to make monthly mortgage payments. The reverse mortgage is different from a home equity loan in that it pays you, and is available to you regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limit for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

You don't make payments, because the loan is not due as long as you live in the house, and it is your primary residence. As with all home owners, you still are required to pay your real estate taxes, homeowner's insurance, and other conventional payments such as utilities. However, with a reverse mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

Next:  Part 2 - Reverse Mortgage Eligibility Requirements

If you're 62 or older and are looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, to pay for healthcare expenses, or even to buy your retirement home, then consider getting a reverse mortgage. Find out how a reverse mortgage can use the equity in your home to pay you.