A reverse mortgage is a special type of loan used by senior adults to convert the equity in their homes into cash. The money from a reverse mortgage can provide seniors with the financial security they need to fully enjoy their retirement years. The reverse mortgage is aptly named as instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower.

With a reverse mortgage, senior adults can remain the owner of their home. They are still responsible for paying property taxes and home-owner insurance and for making property repairs. When the loan is over, the borrowers or their heirs must repay all of the cash advances plus interest. Reputable lenders don’t want the house; they want repayment.

The amount of money lent depends on the specific reverse mortgage plan or program selected, the kind of cash advances chosen, the borrower’s age, and the home’s value. The older the borrower is and the more the home is worth, the more cash that will be available. Some reverse mortgages cost a lot more than others due to interest rates and closing costs, and these costs reduce the amount of money. If the home needs mandatory physical repairs in order to qualify for a reverse mortgage, a portion of the proceeds will be set aside for this purpose.

The money from a reverse mortgage can be used for anything – daily living expenses, home repairs or modifications, medical bills and prescription drugs, paying-off of existing debts, travel, long-term health care, or any other need.

To qualify for a reverse mortgage the borrower must be at least age 62 and own their own home. There are no income or medical requirements to qualify. Seniors may be eligible for a reverse mortgage even if they still owe money on a first or second mortgage. In fact, many seniors get a reverse mortgage to pay off a first mortgage.

Reverse mortgages are offered by banks, mortgage companies, and other financial institutions who are approved. However, not every bank or lending institution participants in the reverse mortgage programs.

Three reverse mortgage products are available to consumers in the U.S. at the present time. The most popular is the federally-insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). Another major product is the Home Keeper reverse mortgage, developed in the mid-1990s by Fannie Mae, a private national mortgage company. The HECM and Home Keeper products are available in every state.

Before applying for a reverse mortgage, the borrowers are required to meet with a reverse mortgage counselor. Seniors may, however, approach a reverse mortgage lender first, who can provide the names of approved counseling agencies in the area. A list of approved counseling agencies nationwide is posted on the Web by the U.S. Department of Housing and Urban Development.

The counselor’s job is to educate borrowers about reverse mortgages, to inform them of other alternative options available, and to assist in determining which particular reverse mortgage product best fits. In general, counseling sessions are done face-to-face, although telephone counseling is becoming more prevalent.

After closing on a reverse mortgage, borrowers have three days to reconsider. If for any reason the borrower decides not to keep the loan, they can cancel it. But, this must be done within three business days after closing.

If the borrower decides to cancel, it must be done in writing, using the form provided by the lender, or by letter, fax, or telegram. It must be hand delivered, mailed, faxed, or filed with a telegraph company before midnight of the third business day. Cancellation cannot be done by telephone or in person. It must be written.

The borrower can choose how to receive the money from a reverse mortgage. The options are:

1. all at once or lump sum;
2. fixed monthly payments for the rest of your life;
3. a line of credit; or
4. a combination of these.

The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows borrowers to draw on the loan proceeds at any time.

All reverse mortgage payments are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. Typically, a “permanent move” means that the borrower or co-borrowers have lived in the home for one continuous year.

The home does not have to be sold to pay off the loan. The borrower (or heirs) can pay off the reverse mortgage and keep the home. In any event, the amount owed on the reverse mortgage can never exceed the value of the home at the time the loan must be repaid. Moreover, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to the borrower or his/her estate.

There are costs associated with getting a reverse mortgage, including the origination fee (which can be financed as part of the mortgage), an appraisal fee, and other charges similar to those for regular mortgages.

Be cautious about finding reputable lenders who will not take advantage.

Obtain advice, even legal or tax advice, before deciding to apply for a reverse mortgage.

The money from a reverse mortgage is tax-free, and does not affect regular Social Security or Medicare benefits. However, the money from a reverse mortgage may affect eligibility for certain kinds of government assistance, such as Medicaid. So, check into this before applying for a reverse mortgage.

The Egyptian Area Agency on Aging does not endorse any specific reverse mortgage lender or product. Before applying for a reverse mortgage, try alternative money saving ideas. Ask a local social service worker at a senior center if there are other programs which can help pay for your bills before making a commitment.

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