A reverse mortgage is a loan which is available to homeowners who are 62 years or older that enables them to convert part of the equity in their home into cash.
The product was conceived as a means to help retirees with limited income use the accumulation wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction for how reverse mortgage proceeds can be used.
The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
The homeowners are not required to pay back the loan until the home is sold or otherwise vacated. As long as the homeowners live in the home, they are not required to make any monthly payments towards the loan balance, but must remain current on the property taxes, homeowners insurance and condominium fees (if you live in a condo). The reverse mortgage loan advances are not taxable and generally do not affect Social Security or Medicare benefits.
There are three types of reverse mortgages:
- Single-purpose reverse mortgages, offered by some states and local government agencies and non-profit organizations
- Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U.S. Department of Housing and Urban Development (HUD)
- Proprietary reverse mortgages, private loans that are backed by the companies that develop them