A reverse mortgage is essentially a loan to a homeowner who uses his home's equity as collateral. It can also be called a senior mortgage or senior reverse mortgage, primarily because many senior citizens take advantage of one to tap their home's equity for living expenses. While a regular mortgage increases home equity when a homeowner makes payments to his lender, a reverse mortgage decreases equity when the lender makes payments to the homeowner.
Equity
Home equity is the financial value of the homeowner's interest in a property. It is also defined as the property's value less the value of any liens on the property. Home equity is generally the maximum value of any reverse mortgage loan.
Payment
A reverse mortgage loan can be made to the homeowner in a lump sum, in installment payments or as a line of credit. The interest for the reverse mortgage loan is deducted from the home equity. The homeowner must repay the reverse mortgage from the proceeds when the home is sold. The homeowner's estate also repays the reverse mortgage loan upon the homeowner's death.
Criteria
A reverse mortgage is only available to homeowners who are at least age 62. Older homeowners qualify for a reverse mortgage more easily because the loan is repaid when the homeowner dies. A reverse mortgage doesn't require a minimum credit score or income, because the loan is secured by the home equity rather than by the owner.
Restrictions
A mobile home must have been built after 1976 and have a permanent foundation to qualify for a reverse mortgage. A reverse mortgage loan also has a maximum limit set by the federal government, regardless of the value of the home equity. This limit is set at $625,000 in 2009.
Costs
The costs of a reverse mortgage typically include the mortgage insurance and title insurance. The fees commonly include an origination fee, an attorney's fee, a title fee and a county recording fee. A reverse mortgage may also require a real estate appraisal and a survey.
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