Basics

A reverse mortgage is a special type of home loan that allows eligible homeowners to convert a portion of their home’s equity into cash. Despite recent troubles in the national mortgage market, reverse mortgages are growing at a rapid rate. Expansion of this hot spot in mortgage lending is expected to continue with increasingly flexible products, new sources of capital and a growing supply of potential borrowers. As the reverse mortgage market develops, it is important that potential borrowers are educated about this complex product to protect them from taking out unsuitable loans.

Reverse mortgages are characterized by the payment flow: Rather than making mortgage payments, the borrower receives cash from the lender. A reverse mortgage enables senior citizens to borrow against their home equity to create a tax-free source of income while they continue living in their home. Borrowers have no monthly repayment obligation until the home is no longer their primary residence. Reverse mortgages require borrowers to be at least 62 years old and have a substantial amount of equity in their principal residence.

Borrowers can draw down payments in monthly installments, lump sums, lines of credit or a combination of these options.

Fees for these products include closing costs, a monthly servicing fee and an insurance fee. The loan principal increases with each payment, as interest and other charges accrued are rolled into the total funds advanced to the borrower.

Borrowers are not required to repay a reverse mortgage until a “maturity” event, namely the death of the borrower, or sale of the property. Although borrowers are not required to make payments until they no longer inhabit the home, they are required to maintain the property, pay property taxes and pay the home insurance.

The reverse mortgage is considered a non-recourse loan. Borrowers and lenders are protected from payment risk. HECM loans carry FHA insurance that ensures that the borrowers will receive all payments due and the lender will receive full repayment of the loan balance.