A reverse mortgage or Home Equity Conversion Mortgage (HECM) is a way to turn the equity locked in your home into tax free cash without having to make any monthly mortgage payments. The funds you receive can be used for almost anything including paying off your existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving your lifestyle.
A reverse mortgage is a government insured loan that enables seniors to gain financial independence from their ever increasing living expenses. And the best part — you continue to own your home and there are no credit score or income requirements.
*Homeowners must continue to pay insurance, taxes and basic home maintenance during loan period.
It’s simple and easy — qualifying depends on these important factors:
You must be age 62 years or older, and
Live in and own your home (must be your principal residence)
Then your age, appraised home value and current interest rates are used to calculate the amount you may receive.
Essentially what this does is slowly takes equity (ownership amount) out of your home and transfers it to a third party. In exchange you most likely have to pay them origination fees and they in turn give you a monthly check, instead of you sending them one (like you probably did for 30 years), hence the name.
When you either sell your home or die and it becomes apart of your estate then the portion of equity that you and the third party owns will be split up depending upon ownership amounts.
CAUTION: if for some reason your home is not worth enough when it is sold or possibly goes into your estate at the time of death, then you could be forced to come up with the difference in order to sell it or settle the estate. My guess is that the financial industry does not think this will happen. Here's a great sight that gives you the pros and cons of this very misunderstood product.