Reverse Mortgage

The Basics

If you need cash and you own a home, there are a few ways to get money out of the property. You could re-mortgage the home or take a home equity loan, on which you'd have to make monthly payments. You could move and sell your home. But if you want to stay in the house, you should consider a reverse mortgage.

A reverse mortgage is a loan on your home, but you never have to pay it back unless you move, sell your home, or die. You can choose several ways to take the loan: you can take a lump sum, receive monthly payments or take out varying amounts when you decide you need it, just as you would with a home equity line of credit.

"It's ideal for someone who has a house that's worth a fair amount of money and who has the need for income in retirement, if they don't have a large pension or other assets," says Marc Collier, a certified financial planner with Wellesley Financial Architects in Wellesley, Massachusetts. "It gives them the opportunity to stay in their home and have the best of both worlds."

Collier says very often the home is the largest single asset a person has, and for the most part, the asset goes untapped. But with a reverse mortgage, people can use the money that's stashed away in their home.

When you take a regular mortgage, the debt gets smaller as you make payments. But with a reverse mortgage, because you're taking payments, the debt gets bigger over time while the equity in your home gets smaller. But your debt will never exceed the value of your home at the time your loan comes due (when you move, sell the home or die.)

Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C., says about 70 percent more reverse mortgages were written in 2002 over 2001.

"More people are learning about them," Bell says. "The reverse mortgage is a solution: No one lays in bed at night saying, 'I'm going to get up in the morning and get a reverse mortgage,' but they do sit in bed and think it would be nice to get a new roof, visit family, help their granddaughter with college, purchase long-term care insurance."

It's a product to consider if you need money for just about any reason, though certain products limit what you can use the money for.

Types of Reverse Mortgages

Reverse mortgages may be offered by state and local governments. These are called public sector loans, and can generally only be used for one purpose as determined by the lender. These can be good if you need to make home improvements, for example. Others, offered in the private sector by banks and lending institutions, can be used for any expense.

Single-purpose reverse mortgages come in several forms, and not every type is available everywhere.

• Deferred Payment Loans, or DPLs, are offered by many government agencies so you can make improvements to your home. This kind of loan gives you a one-time, lump-sum payment. DPLs are among the lowest-cost loans, as they generally have no origination fee, low interest and low closing costs. Also, many DPLs charge simple interest instead of compound interest. That means the interest you owe isn't added to the balance, therefore you're not paying interest upon interest as you do with regular mortgages.
• Property Tax Deferral Loans, or PTD loans, are another single-purpose loan. These can only be used to pay property taxes, and they give you an annual payment. They're not available in every state, and you must be 65 to be eligible for most PTD loans. The amount you can borrow is generally limited to the amount of your annual tax bill. Like DPL loans, the closing costs and other fees are small, and the interest owed is often simple interest.

Multi-purpose reverse mortgages can vary depending on the state in which you live and the lender.

• Home Equity Conversion Mortgages, or HECMs, are the only reverse mortgages insured by the federal government through the FHA (Federal Housing Administration). Loans are made by banks and other lending institutions, and you can use the proceeds on anything, though the amount you're eligible for will be determined by the FHA. These loans are available in most states. To be eligible, you must be at least 62, live in your home, and the home must meet certain requirements set by the Department of Housing and Urban Development. If you still have a regular mortgage, you can still be eligible for a HECM, and the mortgage would probably be lumped in with the new reverse mortgage.
• Private reverse mortgages are offered by banks and other lending institutions, and they may offer you larger payments than HECMs. The details of each loan are determined by the lender, not the government. But these loans tend to be more expensive than HECMs or public sector reverse mortgages. You can use the proceeds from the loan for anything you want.

AARP offers a reverse mortgage comparison tool to help you determine which type of loan might be good for you.