Definition

• A reverse mortgage is a home loan available to seniors at least 62 years of age who have substantial equity in their homes--usually at least 40 to 50 percent. The borrowers take out the loan as a lump sum, line of credit, monthly payment or any combination of these loan types. No payments are required while the homeowners continue living in the home. Instead, the interest on the loan accrues on the principal and the entire loan balance comes due when the homeowners die, sell the home or move.
  
  

History

• Although reverse mortgages can be issued by any entity or person, the only reverse mortgage readily available nationwide since the start of the 2007 recession has been the Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM). The FHA is a federal agency within the Department of Housing and Urban Development (HUD). Legislation passed by Congress in 1987 established the FHA reverse mortgage through a demonstration project. By 1989 the first loans were being offered. By 1998 the program had gone national and was made permanent. Its purpose was, and remains, to allow senior homeowners to unlock the equity in their homes in order to maintain or improve their post-retirement standard of living.
  
  

Repayment Regulation

• By law, the reverse mortgage is a non-recourse loan. This means the home that is mortgaged is the only required source of loan repayment. Neither the borrowers, their children nor their other heirs are responsible for loan repayment. If the house does not appreciate enough to cover the full cost of loan repayment, mortgage insurance repays the lender the difference. If, after repayment through the sale of the home, there is remaining equity in the home, it goes to the borrowers' heirs. Heirs also have the option of choosing not to sell the house; however, in that case they must repay the loan fully through some other source of funds.
  
  

Advantages

• Advantages to borrowers of a reverse mortgage are obvious: They can live off the equity in their homes without having to make loan payments. It doesn't matter what happens to the home's value after the loan has been issued. The advantages to borrowers' heirs are that the home itself can still be inherited. They can choose to keep the house and repay the loan or sell the home and keep any remaining equity after loan repayment. They also are less likely to have to worry about the ability of the borrowers to support themselves in their twilight years.
  
  

Disadvantages

• Because the interest on a reverse mortgage compounds on the principal, there is a possibility the house will not appreciate enough to fully repay the loan. This is a disadvantage to borrowers wanting to leave an inheritance to the heirs, who may be left with nothing after the sale of the house.