For many people, if they know about reverse mortgages at all it is probably limited to seeing them advertised on late night TV. They are not widely used or understood, and might even seem gimmicky; but given the right circumstances, they could be worth considering. Reverse mortgages are primarily designed for older homeowners who have equity in their homes and fixed expenses and needs, but limited income. They might also be useful tools in certain situations, like dealing with temporary illiquidity caused by slow transactions in concentrated wealth. Essentially, these products enable homeowners to borrow against themselves—or the equity in their homes—to provide income in retirement. The most common type is federally insured, but there are also proprietary products. In order to qualify for FHA approved reverse mortgages, borrowers must be 62 or older, and they must occupy their property as their principal residence. They cannot have any outstanding federal debt, including delinquent tax payments. Unlike traditional amortized mortgages that get paid down over time, reverse mortgages actually grow in size as homeowners borrow against equity and postpone interest payments until later on. As a result, income and credit requirements are typically less stringent with reverse mortgages because no payments are required along the way; but this is starting to change in the wake of the financial crisis, and stiffer requirements already apply to jumbo, or larger, reverse mortgages. Still, it could be easier to access financing from reverse mortgages than from traditional mortgages or even from home equity loans or lines of credit.

The borrower can gain income in various ways: monthly payments over a specified period of time or over (joint) lifetimes; upfront lump sums or as needed from revolving lines of credit; or in some combination of these methods. Except for less common single-purpose loans, there are no restrictions on how the cash can be used; and since the IRS does not consider loan advances to be income, the payouts are not subject to income tax. However, in order to minimize the chance for misunderstanding and confusion with such an important asset as the home—especially among older borrowers—counselors are required for anyone seeking FHA approved loans. Typically, more money can be borrowed when interest rates are lower, the borrower is older, and the house is more valuable. Of course, the recent housing crisis adversely affected values across the country; but many areas are now recovering—and more importantly, interest rates remain very low. Despite the downturn, many older people still have significant equity in their homes, having participated in the multi-decade long run up in housing values. Like traditional mortgages, reverse mortgages come in either fixed rate or variable rate terms; and borrowers can either lock in greater certainty (with fixed rate products) or play out the evolving interest rate environment with variable products. Even when a reverse mortgage is in place, though, the title to the property still remains with the homeowner, and the borrower/homeowner is still responsible for all maintenance and repair of the property as well as property taxes.

The reverse mortgage comes due when the borrower dies, moves or sells the property—and at that point the loan is due in full plus all accrued interest. Many loan providers offer what are called “no negative equity guarantees,” which means that there can be no claim against the estate or its beneficiaries for more that the balance of the loan even if it exceeds the ultimate value of the property when it is sold. This is an important feature and one that anyone considering a reverse mortgage should desire; and this applies to the FHA program. Still, since interest compounds over the life of the loan without anything due along the way, the full balance that is eventually owed can balloon and surprise homeowners later in life. For this reason, people have typically not relied upon their homes to finance their retirement. They also do not like the notion of selling their entire home to finance expenses, and they may simply not want to move out of their homes anyway. Unfortunately, many retirees do not have sufficient alternative savings to meet their needs—and traditional pensions have steadily disappeared as well. But unlike trimming an investment portfolio of stocks and bonds, houses cannot be sold off in bits and pieces. As a result, reverse mortgages could help in certain situations, even being used like catastrophic insurance—not to cover day-to-day expenses, but to provide an umbrella for major costs and/or possibly long-term care.