What is a "Reverse Mortgage"

and how do they work ?

Reverse mortgages are a relatively new concept in mortgage loans that allows a property owner who owns his or her own home to get a steady income stream from that property. A reverse mortgage requires no repayment of the loan as long as the home is owner occupied and other stipulations are met.

A reverse mortgage enables older homeowners (62 and older) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Eligible property types include single-family homes, manufactured homes (built after June 1976), qualified condominiums, and townhouses.

Reverse mortgages are federally insured by “Home Equity Conversion Mortgage” program or by “Fannie Mae’s HomeKeeper”, and allow a property owner to get cash from his or her built-up equity in the home. Generally, you can receive the proceeds of a reverse mortage in any of several ways; as a lump sum payment, in monthly installments, or, as is commonly the case, as a line of credit which you can draw upon as needs present themeselves.

The proceeds from a reverse mortgage can be used for anything, including covering normal living expenses, repairing or modifying the property (e.g.: making it more handicapped-accessible), paying health care expenses or other existing debts, paying property taxes, and even preventing foreclosure or taking a vacation.

There are no income or medical requirements to qualify for a reverse mortgage. You may be eligible for a reverse mortgage even if you still have an existing mortgage on your home. However, you must qualify for a large enough reverse mortgage to pay off that existing loan.

Reverse mortgages are what is known in the industry as “nonrecourse loans”. This means that the mortgagor took the loan with the security of the property alone, and in attempting to recapture his investment he has no recourse for recapture beyond it.

This type of mortgage gets its name from the fact that, unlike a normal mortgage where the balance due is slowly paid down, the mortgage balance on a reverse mortgage continues to grow becoming larger and larger as the mortgagees receive funds from it and pay nothing into it. Thus the term "reverse mortgage." Eventually, either all the equity in the home will be exhausted or when the final owner of the home is deceased, a final settlement is made on the property leaving to the heirs of the owners whatever residual equity, if any, remains.

This type of mortgage carries some fees which are peculiar to it and not generally found in a normal type of mortgage. These fees include administration and servicing fees, "equity sharing fees” and “maturity fees”.

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Not all reverse mortgages are equal, but this is especially true with reverse mortgages. When considering this type of loan, it is wise to retain the advise of a lawyer familiar with these types of mortgages to review for you the mortgagor’s disclosures under the Federal Truth-in-Lending Act.