What Is a Reverse Mortgage?

How to get paid to live in your own home

Retirement has its benefits. While some nearing retirement yearn for hammocks, umbrella drinks, or returning to a long-neglected hobby, others look forward to the reverse mortgage. To qualify for a reverse mortgage in the United States, one must be 62 years of age or older, and have received approved HUD counseling to ensure sufficient understanding of this unique loan.

No free lunch

If you thought the L-word concluding the previous paragraph was the catch, you're on to something. Make no mistake, a reverse mortgage is a loan and, like all loans, requires repayment. Similar to home equity loans, reverse mortgages are a way to convert equity into cash. Qualifying persons retain ownership of their home and continue to reside there, yet they make no monthly payment for the privilege. Homeowners also may receive payments in addition to this "free ride." They even skip repayment until they've moved on to another residence.

Ay, there's the rub

While it's true that homeowners with reverse mortgages make no monthly mortgage payments, they are responsible for any interest that accrues under the period of the loan, which is added to the lien on the property. Any monthly payments the borrower receives are also added to this total, thus increasing the total debt on the owner has on his or her home.

Why it might be worth it

Reverse mortgage loans are a good way to access the investments you've made in your home over the years without actually selling. Loan payments are rather flexible as well. Borrowers can choose from any or all of the following methods of payment:

Lump sums

Monthly payments

Expanding lines of credit

Better still, these payments are not taxable. When owners finally sell their homes, they can use the proceeds to repay their reverse mortgage loans.

All options on the table

Reverse mortgages come with high up-front costs. Consider home equity lines of credit, intra-family loans, or even sale-leaseback arrangements. All have their benefits and drawbacks. As always, talk to your financial advisor to discuss your available options and determine those that are best for you.

More information on reverse mortgages