What are Reverse Mortgage Loans? What Types are Available?

Reverse mortgages are the opposite of traditional mortgages in that the borrower receives payments from the lender instead of making payments to the lender. Reverse mortgages are designed to enable senior homeowners to remain in their homes while using the equity in their homes as a form of income. In general, reverse mortgages may take on of two forms: term or tenure. Under a term reverse mortgage, the borrower is provided with income for a specified period. Under a tenure reverse mortgage, the borrower is provided with income for as long as he or she continues to occupy the property.

For borrowers, the most risky reverse mortgage is the term reverse mortgage. Borrowers have been reluctant to enter such mortgages because at the end of the loan term the borrower would likely have to sell the home and move. For lenders, the most risky reverse mortgage is the tenure mortgage, because the mortgage debt grows over time, and the debt could exceed the value of the home if the borrower lives longer than his or her life expectancy. The use of tenure reverse mortgages has grown in recent years due to the availability of an FHA-insured reverse mortgage. Under the FHA program, the risk of the borrower living too long is shifted to the federal government.

There are three common types of reverse mortgages:

1. Home Equity Conversion Mortgage Program (HECM)
2. Home Keeper
3. Cash Account Plan

There is a fourth, “Senior Equity Reverse Mortgage” plan, but it’s (at present) only available in Arizona, California, Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Texas and Virginia.

All of these plans are tenure reverse mortgages. These tenure mortgages also provide the borrower with flexibility on how the income from the mortgage is received. A borrower may receive monthly payments as long as the property is occupied by the borrower. The borrower may receive a line of credit which grows at some specified annual rate and upon which the borrower may make draws as needed. The borrower may choose to receive a large up-front cash advance. Or the borrower may choose any combination of the above.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”