A reverse mortgage is a set-up where the bank or other lender loans the homeowner money, based on the value of their house. It can be arranged as payments of a certain amount over a certain amount of time, or a credit line up to a maximum amount, or even as a lump-sum amount. This is often an option for elderly people who own a home (or are close to paying it off) who would like an income, since reverse mortgage payments do not affect Social Security or Medicare benefits if the money is spent within the month it is received, are free of federal and state income taxes, and the loan (plus interest) only becomes due when the homeowners sell or vacate their home (this includes their deaths). Many reverse mortgages require that the borrowers be 62 or older.

Since the loan can't exceed the value of the home, it won't end up as a debt that the homeowner's estate has to pay as long as the homeowner's heirs are willing to sell the house; if the heirs don't repay the loan, then the house becomes the property of the loaner. (Obviously this wouldn't be an option for anyone who wishes to pass on the house to their heirs for keeps.) Another plus is that absences from the home of up to a year (hospitalization, extended vacations, whatever) are allowed before the homeowner is considered to have "vacated" the home. If multiple people are borrowing money through a reverse mortgage, the loan is not due as long as one of them is still occupying the house as a principal residence (more than half of each year, usually).

Since the loan depends on the value of the house, if the borrower doesn't keep up the house and causes the value of the house to drop (for example by neglecting repairs) the loan can become due. The home equity naturally drops as the homeowner's debt increases (unless the home's value is increasing extremely fast) because the equity is essentially the power as loan collateral that an asset has; if it's already securing a loan, then you aren't likely to be able to use it to secure a second loan.

The U.S. government insures the Home Equity Conversion Mortgage, and some state and local governments offer reverse mortgages, as well as private organizations such as Fannie Mae's Home Keeper reverse mortgage, Financial Freedom Senior Funding Corp.'s Cash Account Plan. In Canada, a reverse mortgage product called the Canadian Home Income Plan is available nationwide.

American Assocation of Retired Persons, "Understanding Reverse Mortgages," http://www.aarp.org/revmort/contents/overview.html
Jim Gallagher. "What Is A Reverse Mortgage And Do I Need One?" Solutions for Seniors Association Newsletter, Volume 2 Issue 1, Spring 2002.
National Reverse Mortgage Lenders Association, "What Is A Reverse Mortgage?" http://www.reversemortgage.org/Revmtg.htm
National Center for Home Equity Conversion Mortgages, "NCHEC: Basic Q & A," http://www.reverse.org/Basic%20Q&A.HTM

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