What is a Reverse Mortgage?

What is a reverse mortgage? It is a financial instrument available to Americans 62 years old or older. Basically, a reverse mortgage allows seniors to use the cash equity that they have built up over the years to make mortgage payments. Whereas a standard mortgage requires the borrower to make a monthly payment and generate equity, a reverse mortgage pays the monthly fee from the equity itself, and the pool of equity depletes as the months and years go by.

Taking a reverse mortgage may be a palatable alternative to taking out a home equity line of credit. When you borrow against the equity with the line of credit, you can get very low interest rates during the initial few months, but you'll still have to pay fees every month and make good on your credit obligations down the road.

Reverse mortgages, on the other hand, charge major closing cost and other fees upfront. These fees are well over the closing fees associated with traditional conventional mortgage closings, but they allow the borrower to dispense with monthly payments all together.

Seniors should pay attention to the implications of reverse mortgages for Medicare, social security, and other public benefits financing. The more liquid asset capability you have on hand, the more difficult it can be to tap into public help.

If your home is appraised at more than the $417,000 maximum cap for a Fannie Mae viable product, a reverse mortgage becomes something known as a cash account. The vast majority of US reverse mortgages are Federal Housing Administration insured products.

The FHA's program has helped process nearly 200,000 conversion mortgages since the end of the 1980s. You can find statistics for reverse loan volume through organizations such as the National Reverse Mortgage Lenders Association. It may behoove you to pay some of the reverse mortgage closing costs by cashing out other assets or instruments to simplify your financing.