- In 1987, Congress established a reverse mortgage program to be implemented by the Federal Housing Administration (FHA). A demonstration project began in 1989. In 1990, the program was unveiled nationally. After positive feedback from both lenders and borrowers, the program was made permanent in 1998. Although more reverse mortgages are issued every year, only about 400,000 had been made through 2007.
- Reverse mortgages are available to homeowners age 62 or older who have more than 40 percent equity in their homes. The maximum loan available depends on the lesser of the home's value or a regional cap set by the FHA, the borrower's age, the interest rate at the time the loan is taken out and the loan type -- lump sum, line of credit or monthly payments. The loan must be repaid after the homeowner moves away for a period of 12 consecutive months, sells the home or passes away. Generally, the repayment is made by heirs selling the home.
- The borrower can not only choose between a lump sum, line of credit or monthly payments, he also can combine loan types in any manner and ratio he chooses. Although no payments on the loan are required while the borrower lives in the home, he can opt to make payments to maintain equity for his heirs. He can also fully repay the loan if he wins the lottery or decides to sell and retire elsewhere.
- To issue an FHA reverse mortgage, which as of 2010 is the only commercially available reverse mortgage, a lender must be approved by the FHA. The website of the Department of Housing and Urban Development (HUD), the federal agency to which the FHA is attached, lists all lenders it has approved to make reverse mortgage loans. Many of the major banks, such as Bank of America and Wells Fargo, are included on this list.
- The key advantage to a reverse mortgage is that no payments have to be made while borrowers remain living in the homes. Another advantage is the designation of a reverse mortgage as a "nonrecourse" loan. This means that neither the borrower nor his heirs are personally responsible for the loan repayment. The lender must rely on the sale of the house for loan repayment. If the sale does not result in full repayment, the lender can be reimbursed for the difference by mortgage insurance. Many lenders offer the reverse mortgage: you may not have to go farther than your neighborhood bank.
- On the down side, reverse mortgage loan costs are high -- between two and five times the cost of taking out a standard home loan. However, because the reverse mortgage is offered by so many lenders, you can shop around for the most competitive closing costs. Additionally, because no payments are usually made on the loan, interest compounds on the principal, resulting in a final loan balance that is well beyond the initial loan amount. Depending on home appreciation rates, this can ultimately result in little if any remaining equity in the home for heirs after loan repayment.
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