For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home-equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest.

A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title “reverse mortgage”.

In a reverse mortgage or home-equity conversion mortgage (HECM), you trade some or all of the equity in your home in return for tax-free income from a bank or other lender. The lender’s payments may be in the form of cash (a lump sum), monthly payments, or a line of credit you can draw on as needed, or any combination of these options. Most reverse mortgages are adjustable-rate products. However, lenders are beginning to develop fixed-rate and larger-denomination loans.

If you are running low on cash, put on the brakes and carefully analyze cash flow before obtaining a reverse mortgage. Because of the high closing costs, a reverse mortgage is a bad idea if you plan to move in a couple years, or if you have a temporary financial emergency that might be better resolved with a home equity loan. Carefully weigh the pros and cons of all cash flow options. Folks in early retirement should remember that the younger they are, the less money they are eligible to receive because of the life expectancy factor in the loan payment formula.

In short, a reverse mortgage is a “rising debt, falling equity” type of deal. But that is exactly what informed reverse mortgage borrowers want: to “spend down” their home equity while they live in their homes, without having to make monthly loan repayments.

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