Many retirees and seniors find themselves “asset rich and cash poor”. They have a great deal of equity built up in their homes or even own them outright, but are receiving a very small amount of monthly income from pensions or government plans. The concept of the reverse mortgage was created to resolve this discrepancy.

A reverse mortgage is a way to access the equity in the home without creating monthly payments. This should not be confused with a home equity loan where principal and interest payments have to be made. Essentially the cash flow runs from the bank to the home owner.

This option is attractive to seniors as it allows them access to cash while being able to keep their home and avoid a monthly loan payment. There are no restrictions on what the money can be used for. It can be paid as a lump some, monthly, or via line of credit.

Interest rates are usually adjustable-rate products, however fixed rate options are beginning to be introduced.

When insured by the federal government, they are known as a home equity conversion mortgage (HECM). These loans are guaranteed by HUD and the Federal Housing Authority. As of last year more than 300,000 seniors had participated in the program. The biggest drawback to an HECM is that there is a maximum loan amount.

One hesitation in opting for a reverse mortgage is that their will be less equity to leave as an inheritance for children. While many do not see this as a problem it is something that you might want to give consideration to.

While they have many universal benefits, a reverse mortgage is not the right solution for everybody. If you do not anticipate that you will be in the home into the foreseeable future then you may want to reconsider as the closing costs may be prohibitive.