For many people approaching retirement, their major financial asset is the equity in the home they own. One way to tap that equity if needed is to sell the home and downsize to a smaller home or rent. When individuals wish to stay in their home but need to tap their equity without having monthly loan payments, a reverse mortgage may be a sound option in the right circumstances. For most individuals, this option should probably be a last resort, but you will certainly want to be informed about the option as you plan.
To help you make an informed decision about reverse mortgages and other alternatives, the AARP Foundation has produced the booklet, Home Made Money A Consumer's Guide to Reverse Mortgages (pdf).
A reverse mortgage is a loan in which you receive money from a lender that doesn't have to be paid back until you sell your home, you move out permanently, or you die.
There are three types of reverse mortgages:
These are also known as Home Equity Conversion Mortgages (HECMs), are backed by the U.S. Department of Housing and Urban Development (HUD).
Proprietary reverse mortgages are private loans that are backed by the companies that develop them.
Single-purpose reverse mortgages are offered by some state and local government agencies and non-profit organizations. These are not available everywhere. They can only be used for the one specific purpose specified by the lender. Examples of such specific purposes include to pay property taxes or to finance home repairs or improvements. This type of reverse mortgage is primarily for low or moderate income homeowners.
You may have a choice in how you receive the money from a reverse mortgage. Generally speaking, you will have one or more of the following choices:
A line of credit allows you to decide how much you need and withdraw it when you need it.
Here are some other things you need to know about reverse mortgages. Be sure to check them out thoroughly before agreeing to terms:
There may also be servicing fees during the term of the mortgage. These fees and costs are usually set by the lender.
Interest is charged monthly on the outstanding balance and is added to what is owed.
If you don't keep up with these the loan may become due and have to be repaid.
The fact sheet Reverse Mortgages: Get the Facts Before Cashing in on Your Home's Equity from the FTC has more information.