Reverse Mortgages

Reverse mortgages are not used when buying a home, but instead are for people who already own their home. They got their name because the lender makes mortgage payments to you on your home, rather than the other way around. Let's take a look at the types of reverse mortgages available, the way they work and who they work best for.

Reverse mortgages allow you to use the equity in your home (much like home equity loans) to obtain cash payments by agreeing with a lender to trade equity in your home for the payments. Reverse mortgages usually require that you own a home unencumbered by mortgages or other liens, so that there is a good amount of equity in the home. If you choose to obtain a reverse mortgage, you can go to some of the same types of lenders that offer other mortgages and you will need to be approved for the mortgage. You can get information about reverse mortgage lenders from the National Reverse Mortgage Lenders Association website.

Whether you qualify for a reverse mortgage is mainly based on your age (a homeowner must be at least 62 to be eligible) and the amount of equity in your home. And as is true for other types of mortgages, interest rates vary greatly. You are also required to pay closing costs when you obtain a reverse mortgage.

The amount of interest you owe is increased each month with reverse mortgages. This is the opposite of more conventional mortgages where interest decreases every month and you get closer to paying off your principal loan amount. If you die, sell or move out of your home, the reverse mortgage must be paid off. If the reverse mortgage is not paid off, the lender will own your home.

The payments you receive from a reverse mortgage, whether it is in a lump sum or in monthly installments (or through a line of credit, much like home equity lines of credit) are not subject to income tax. However, keep in mind that the interest owed is not tax deductible.

You can also use a reverse annuity mortgage (RAM) to receive payments on the equity in your home. The way RAMs work is that you obtain a mortgage on your home and use the funds to purchase an insurance company annuity plan. The insurance company pays your mortgage interest and you receive the difference in monthly payments.

The monthly payment you receive depends upon factors similar to those used in reverse mortgages--the equity in your home, your age and the lender's interest rate. When you die, the insurer sells your home and uses the proceeds to pay the balance of the mortgage. If anything is left over, your estate receives that amount.

Who should consider a reverse mortgage? You should consider a reverse mortgage if you are a homeowner close to or in the retirement stage of your life, you want to continue to live in your home, and you find that your investments do not produce enough income for the necessities of life. This is especially true if you have no heirs. Ideally, you should be on the older side of the minimum age if you consider a reverse mortgage because the equity in a home, no matter how large, is not going to last forever.

What if you have no heirs and you're getting by, but you don't have other investments to tap into for some traveling and the like? You can use the equity in your home for non-essentials, but make sure you don't go too far and leave yourself with no equity in your home that you may need to tap into. Even if you have heirs, such as children and grandchildren, but they are better off than you or you simply don't care to leave them anything, it's your prerogative to use up the equity you've built up in your home while you're alive.