Home Loans

Reverse mortgages can sometimes be a good option to provide extra income to people in their retirement years to supplement social security payments, or other income that may not be adequate for day-to-day living. A reverse mortgage is a home loan that works by allowing homeowners to borrow against the equity in their homes and receive payments from the loan. This is exactly the opposite of regular "forward" home loans where home equity increases as the amount of the debt decreases. With a reverse mortgage, the amount of the debt increases as home equity decreases.

The reverse mortgage is different than a traditional home equity loan in that the borrower is not required to have income to qualify, receives payments instead of making payments, and is virtually immune to foreclosure. However, since the reverse mortgage erodes borrower equity it is only appropriate in cases when extra income is needed for living expenses. The up front fees for reverse mortgages are much higher than for traditional home loans, and since interest is charged against the amount paid to the home owner it is not a good option to use the proceeds to make investments or to pay for a dream vacation.

Not everyone is eligible for a reverse mortgage. Typically, the home owner must be of retirement age, own the property outright, or have only a first mortgage against the home that can be paid off with the proceeds of the new loan. Before considering this course of action it is advisable to explore other options for reducing expenses or supplementing income. A reverse mortgage is usually not appropriate if the homeowner is not going to live in the house for long, because the loan must be paid back when the home is vacated, and because the higher up-front fees would make it very expensive as a short term loan. In the event that the home owner either dies or moves out of the home, proceeds from the sale of the home would be used to pay off the amount paid to the homeowner plus any interest, and any remaining equity would be kept by the heirs or the homeowner.

Most reverse mortgage products should contain a nonrecourse clause. This means that the borrower can never owe more than the home is worth. In the event that the amount paid to home owners, plus any interest, exceeds the home(s) value when the loan is due, the borrowers, the estate or the heirs will not have to pay anything to the lender beyond what the property sells for. This limited liability can make the reverse mortgage a good option to provide income for living expenses when there are no better alternatives.