A reverse annuity mortgage, also called a reverse mortgage or a home equity conversion mortgage, allows the homeowner to tap into the equity in his or her home. Restricted to those over 62 years old in the United States, a reverse annuity mortgage allows the homeowner to supplement his or her retirement income. The amount of income the borrower receives depends on the value of the home, the interest rate, the borrower's age, and the expected appreciation of the property. The loan amount is calculated so that it will not be greater than the value of the house over the life of the loan.
The borrower can receive the proceeds from a reverse annuity mortgage in several ways. The most common way is to receive a monthly payment, which is used to supplement the borrower's Social Security, pension, or other retirement income. The proceeds can also be taken as a lump sum, or as a line of credit that is drawn upon when needed. Reverse annuity mortgages generate tax-free payments.
In the US, the only qualifications for a reverse mortgage is that all borrowers be at least 62 years old, that they occupy the home as their primary residence, and that any existing mortgage on the home be paid off by the reverse mortgage. The lender of a reverse annuity mortgage does not require a credit check or other income documentation, because the borrower is not making any payments on the loan. There are origination fees and closing costs associated with a reverse annuity mortgage. These fees are typically rolled into the principal amount and accrue interest during the life of the loan.
When the last surviving borrower moves out of the home or passes away, the reverse mortgage is repaid, usually by selling the house. The amount that is repaid to the lender is the sum of all of the payments that were made to the borrower, plus accrued interest. Any equity remaining in the house after the mortgage is repaid belongs to the borrower or the borrower's estate. The heirs can sometimes repay the mortgage from other funds if they want to keep the house.
A reverse annuity mortgage arrangement can provide much-needed additional income in retirement. It is especially attractive to those who have a lot of equity in their home but few other liquid assets to supplement their retirement income. It allows them to remain in their home, and still have the required income during retirement.