Reverse mortgages are a financial tool that allows elders (62 years or older) to tap home equity to improve their cash flow. Reverse mortgages are given only for primary residences. Investment properties and holiday homes do not qualify for reverse mortgages. There is a condition that you must have lived in the property for more than six months of the year.

The difference between regular mortgages and a reverse mortgage
Both reverse and regular mortgages are loans backed up by your house, which must be repaid to the lender. With a regular mortgage, you are given a loan upfront to buy a house, and repayment begins every month for a select number of years, which is pre-agreed upon. With a reverse mortgage, you are taking a loan on the home equity that you have built, with a line of credit, without monthly repayments. Repayment is made when you sell the house or after you pass away.

Types of reverse mortgages available. There are three popular types of reverse mortgage options available to choose from, which are as follows:

1. Single-purpose reverse mortgages
These are the cheapest reverse mortgage options offered by some state and local government departments and non-profit organizations. As the lender mentioned in the loan agreement, these loans can be used for only a specific purpose. For example, the loan may be used to pay for home repairs, home improvements, or property taxes. These types of mortgages are for homeowners who fall within the low-income bracket.

2. Proprietary reverse mortgages
They are private loans backed by the companies that develop them. You can get a more significant loan advance from a proprietary reverse mortgage if you own a higher-valued home. Proprietary reverse mortgages provide larger loan amounts than permitted under other mortgage programs.

3. Home equity conversion mortgage (HECM)
A home equity conversion mortgage is a type of reverse mortgage with the backing of the Federal Housing Administration (FHA). Home equity conversion mortgages allow senior citizens to convert the equity in their homes into cash. The amount borrowed is based on the home’s appraised value (subject to FHA limits). Money is lent against the value of the equity in the home, and interest accrues on the outstanding loan balance. No repayments for the mortgage are made until the home is sold or the borrower passes away, at which time you must pay the loan amount entirely.

4. Eligibility for a home equity conversion mortgage – (HECM)
The FHA sponsors the home equity conversion mortgage and provides insurance on the products. The FHA sets the guidelines and the eligibility for these loans. Borrowers are allowed to borrow only from banks where the FHA sponsors the product. The requirements set by the FHA for a HECM are as follows:

• Age requirement of 62 years or older
• Residence should be the principal residence
• The property must be owned outright
• The owner should not be delinquent on any previous federal debt
• The applicant should have the resources to pay the ongoing property charges like taxes, insurance, and homeowners association fees.
• The property should be a home that meets FHA requirements
• Lending is restricted to 80% of the value of your home

The distribution of the funds from a reverse mortgage can reach you in any of the following ways:

• Lump sums
  You can take the cash you’re sanctioned upfront. These types of mortgages have a fixed interest rate.
• Line of credit
  You can set up a line of credit, where you draw funds as and when needed. This can be done till funds are available to be used.
• Tenure payment
  You receive a monthly payment that lasts as long as you stay in the house. The interest rates are adjustable.
• Term payment
  You can receive funds monthly for a fixed period, with interest rates being adjustable.