A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash.

If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity. The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home.

In 1988 Ronald Reagan signed the law that started reverse mortgages backed by the federal government. They were designed to help seniors tap into the equity of their home and avoid house payments for the rest of their lives. This allows many seniors with lower incomes to remain in their homes. When they pass, heirs have approximately one year to sell the home or pay the loan balance. Heirs are never responsible if there is not enough equity to pay the loan balance. If sold for more than what is owed the heirs of course get that money.

You must be at least 62 years of age. A married couple can apply together. There must be a minimum of 55% equity in the home at age 62. In other words if you owe $45,000 and your home is worth $100,000 you have 55% equity in the home. The older you are the more you qualify for, because the loan is based on your life expectancy. In other words, someone who is 72 years old will qualify for more than a 62 year old. The concept is based on life expectancy. So there will be sufficient equity to pay the loan at passing. Your mortgage is paid off by the reverse mortgage and you stay in the home with no payments. You can still sell the home during your lifetime if you choose. You are required to maintain the property, pay property taxes and insurance. Sometimes these payments can be paid by the reverse mortgage. If there is enough equity it is possible to receive a certain amount of extra income each month or have access to a line of credit. So for example a senior with $2000 in income and a $800 house payment, after a reverse would find themselves with an extra $800 per month in their monthly budget, less any property taxes or insurance. And if enough equity, access to an extra monthly sum or a line of credit.

There can be road blocks. Primarily if there is not enough equity. The house must appraise for a sufficient sum. Manufactured homes and condominiums have extra requirements. Credit rating or old debts are generally not an impediment. The interest rate on the balance owed is low. Reverse mortgages are regulated. It is not like buying a car where you have to shop to get a good deal. However an experienced broker is important. There is very minimal or no cost to apply. You have to participate in counseling session over the phone. If you get a reverse the only one that “loses” so to speak is, possibly, is your heirs. They may not get as big of an inheritance. Part of your homes equity was used to help you during your lifetime. However I can’t imagine too many kids who wouldn’t want mom and dad to be more comfortable in their seniors years.

Several months ago, Loretta, age 71, called HELPS nonprofit law firm. Her husband had left her and she was stuck with a big mortgage payment, and not many resources left. Her income social security and two small pensions, totaled a little over $1800 per month. She was going through a divorce. I explained a reverse mortgage and how it might possibly help her. She was originally skeptical because of what others had told her. She started the process and had everything done, simply waiting for the divorce decree. She just called. Through this reverse mortgage transaction, her $116,000 mortgage was paid, which eliminated her $882 mortgage payment. Additionally, she is receiving a line of credit for another $33,000, which she can use for other expenses. She only needs to maintain the property taxes and house insurance. She was thrilled with the outcome and very grateful.

Negative impressions about reverse mortgages originated in the first few years of the program when it is less regulated. They are still out there. When real estate prices plummeted after 2008, laws were changed to require a larger equity cushion to qualify. Don’t believe everything you hear. For many seniors, a reverse can change everything. They can stay in their home without a payment for the rest of their lives and still provide an inheritance to their loved ones.

Eric Olsen, Executive Director HELPS nonprofit law firm.

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