Reverse Mortgages

Mortgages have come a very long way in the past fifty years. Lenders today offer many more options than the basic 30-year fixed-interest product that normally comes to mind. There are even mortgages in which payments are made to the homeowner and not the lender. These very specialized programs are known as reverse mortgages.

With a conventional mortgage, the lender typically supplies the borrower with a lump sum of money, which is used to purchase a piece of property. In return, the homebuyer agrees to repay the lender in monthly installments for a specified period of time at a specified (fixed or variable) rate of interest. The amount of the monthly payment is determined by the repayment period and the interest charged.

A reverse mortgage functions in much the same way except (you guessed it!) in reverse. Instead of the homeowner making the mortgage payments, the lender pays the homeowner. The homeowner can choose to receive the mortgage proceeds as a lump sum, in monthly or quarterly payments, or even as a line-of-credit. In addition to interest rates and the payment period chosen, the size of reverse mortgage payments are determined by the homeowner's age, the appraised value of the property and its accumulated equity.

Why would anyone choose a reverse mortgage? Well, with the baby boomer generation now entering their retirement years, many own homes that have significant amounts of equity built up in them. Unfortunately, equity is a fixed asset; in other words, it can't be easily converted to cash that can be deposited into a checking or savings account or invested. Traditionally, the only way to actually realize this asset has been to sell the property and move to a less-valuable dwelling (refinancing or taking out a second mortgage simply borrow against the equity). The difference in prices could then be obtained as spendable cash.

However, many people develop a strong emotional attachment to their homes over the years. Much of a person's life – and numerous life events – may have taken place under the roof of their home. The birth and raising of children, graduations, marriages, deaths, and many other smaller but no less sentimental occasions reside with the occupants in the midst of the home. There can be quite an upheaval involved in selling a home, the place where a major part of one's life has been spent. Add to that the agony and extreme inconvenience of simply having to physically move decades of one's accumulated possessions and valuables, along with the obvious necessity of having to locate a new place to put them, and it's understandable why changing homes is so low on many older people's list of things to do. It also becomes clear why a reverse mortgage might be a viable option.

A reverse mortgage allows homeowners to keep their property and draw an income from it. It's like having one's cake and eating it, too. For decades, the homeowner paid to support his or her home. Using a reverse mortgage, the home can now support the homeowner. Much of the property's accumulated equity – usually up to sixty percent of it – can be converted into tax-free cash to supplement the owner's income, typically at a time in life when it's more than welcome – the retirement years.

For additional information regarding reverse mortgages, please visit the U.S. Department of Housing and Urban Development's website.