A reverse mortgage (also known as a Home Equity Conversion Mortgage and often referred to by the acronym HECM, pronounced “heck’em”), is a mortgage that provides monthly payments from equity that’s accumulated in the borrower’s home. In a conventional mortgage arrangement, the borrower makes monthly payments to the lender, thereby reducing the principal amount owed with each payment. In a reverse mortgage the borrower makes no payments to the lender. The accrued unpaid interest, along with the amount that’s paid to the homeowner each month is added to the borrower’s principal balance. (Note: The homeowner retains title to the home and is still responsible for the home’s maintenance, along with paying property taxes and insurance).

As you can see the reverse mortgage is named correctly because the payment stream is “reversed.” Instead of making payments to the lender, as is the case with a regular mortgage, the lender makes payments to YOU.

Under reverse mortgage guidelines, the homeowner can defer repayment of the loan until they die, sell or vacate (cease to occupy the property as their primary residence). Upon the homeowner’s death, their heirs can relinquish ownership in the home, refinance and payoff the reverse mortgage, or sell the home to repay the reverse mortgage. It should also be noted that theoretically the rising loan balance could eventually exceed the value of the home, the borrower or their estate is not required to repay any sum above the fair market value of the property. In addition, the proceeds from a reverse mortgage can be used for any purpose the homeowner chooses including home improvements, paying off a current mortgage, supplementing retirement income, healthcare expenses, traveling, investing, opening a business, etc.

Proceeds can be taken in a number of ways including: 1) As a cash lump sum payment at closing; 2) As a line of credit which makes the loan proceeds available as the homeowner needs them; 3) In the form of a tenured annuity that pays the homeowner an equal monthly payment (tax free) until the home is vacated, sold, or the homeowner dies; 4) A Term payout that pays the homeowner a certain amount each month for a predetermined period of time; and, 5) The option of a Combination payout utilizing two or more of the alternatives set forth above—perhaps a lump sum at closing and a tenured annuity to be received until the home is vacated.