A reverse mortgage, as its name says, is a loan wherein the lender pays the borrower instead of the usual setup where the borrower pays the lender as done in traditional regular mortgages. To be exact, a reverse mortgage is a home equity loan that allows you to transform some of the equity in your home into cash while you continue to hold the ownership of your house.

To find out the equity of your home, it is necessary for you to calculate the difference between the appraised value of your home and your outstanding mortgage balance. As your outstanding balance shrinks and/or property value grows, the equity of your home increases and vice versa. Reverse mortgage, therefore, is borrowing money relative to the amount of equity in your home.

Unlike conventional home equity loans, most reverse mortgages do not require you to pay principal interests and other fees as long as you reside in your house. There is no restriction as to the use of your loaned cash from a converted equity. The money can be used for anything like education, travel, credit card debt etc. The lender could request that you pay a part of your converted equity to pay off the balance of an existing mortgage.

Reverse mortgages are rising-debt loans. This means that unlike regular mortgages where the borrower lowers his/her debt as he/she pays the lender, reverse mortgages increases your debt as lender gives you more money. Since you retain the title of your house, it is still your responsibility to pay for its maintenance, taxes, etc.

Reverse mortgages are not suited for everybody. Those who usually avail of this are people who are “house rich” but are “cash poor”. In order to avail of a reverse mortgage, first, you must own a house. Second, you must be at least 60 years old. Others allow only those who are at least 70 years old and have a low income. Third, you must be currently residing in your home and must have stayed there for a minimum of half a year. Most reverse mortgages convert equities of homes that are single-family units only, 1-to-4 unit building or a federally-approved condominium. If your equity is not large enough to pay off balance of your current mortgage, then, you are not qualified to get a reverse mortgage. Most reverse mortgages allow only those who have paid existing debt. If you qualified for a reverse mortgage for purposes of house repair, the cash that will be gained must only be used for this purpose.

One possible risk of acquiring reverse mortgages is that the interest is compounded. This means that you are paying interest for both the principal and the interest which has already accrued each month. It is safe to say that you must not borrow more than you need since most of your converted equity will only be used to pay off your compounded interests.

Despite these risks, reverse mortgages can be beneficial especially to senior citizens who find themselves with a highly valuable home but without cash. One benefit is that your debt can never exceed the value of your home. You can use the converted equity to pay previous home debt. You will be guaranteed with a monthly income without the need to make payments for as long as you live in the house.

Again, before you commit to a reverse mortgage, please do your research or consult specialists to help you weigh the benefits and disadvantages of such a mortgage.