Are you or your loved ones home rich - cash poor?  If you’re feeling pressured for cash, are 62 or older,  own your home free and clear or have a very small mortgage balance, you have the option of using  your house as a source of tax-free income.

This type of loan is called a reverse home mortgage. Unlike a traditional mortgage where you pay out a monthly sum of money, this loan instead pays you. You will receive a certain amount of cash. It can be in the form of a lump sum or monthly payments. You can also obtain a line of credit to use when needed along with one of the payoff options. As for the interest rates, reverse mortgages are usually offered at variable rates.

The amount of money you can receive from a reverse home mortgage depends on several factors: your age, your home’s value and location, and current interest rates.

The National Reverse Mortgage Lenders Association says the biggest misunderstanding about reverse home mortgages is the fact that even with one, you are still responsible for your home’s taxes, repairs, and maintenance costs. 

What are some of the pros of obtaining a reverse home mortgage?

1. Since payments are considered a loan, they are tax-free.

2. You can use the money for any purpose. Most people use the  funds for home improvements, for in-home healthcare and to pay taxes and insurance costs. Some people, whose CDs or IRAs have been hammered by the drop in interest rates and stock prices, are opting for reverse mortgage lines of credit as a security cushion.

3. You are guaranteed a source of money for as long as you need it, no matter how long you live.

4. The reverse mortgage is only paid off when the homeowner  sells, moves out permanently or, as most often happens, dies.

5. No matter how much you wind up borrowing, you will never owe more than the house is worth when the loan is repaid. 

6. Once the house is sold, if there is any surplus after the debt to 
the lender is paid, your heirs will receive it.

What are the cons of a Reverse Home Mortgage? 

1. A reverse mortgage is no free lunch. They can be extremely 
expensive transactions. Many come with high closing costs, monthly compounding of interest, servicing fees and mortgage insurance that rises with the loan balance. These fees can be financed, but these costs will then be tacked on to your loan.

2. This type of loan can also reduce the size of the estate your heirs will receive.

3. Low-income borrowers need to be careful.  A reverse home  mortgage might make it difficult to qualify for other badly needed aid such as Supplemental Security Income or Medicaid.

4. Finally, reverse home mortgages are so complex that you are required to receive counseling before applying for one.  The confusion is caused by there being three basic types of reverse mortgages: the HUD backed mortgage, the lender-insured mortgage, and the uninsured mortgage. The most popular is the Home Equity Conversion Mortgage, which is insured by the Federal Housing Administration.

In conclusion, I’ve got to say that while reverse home mortgages can be a great alternative for some older Americans with cash flow problems, they are not for everyone.

An excellent source for additional information on this unique type of loan is the nonprofit National Center for Home Equity Conversion. The web site is www.reverse.org. Phone number 612-953-4474

For help with reverse home mortgage counseling, call the Department of Housing and Urban Development’s Housing Counseling Clearinghouse.  888-466-3487.