A reverse mortgage is a home equity loan that permits you to convert some of the equity in your home into cash while you retain ownership. This can be an attractive option for senior citizens who may find themselves “house rich” but “cash poor”, but it is not right for everyone.

Equity is the difference between the appraised value of your home and your outstanding mortgage balance. The equity in your home rises as the size of your mortgage shrinks and/or your property value grows. In a reverse mortgage, you are borrowing money against the amount of equity in your home.

Most reverse mortgages do not require payment of principal, interest and certain fees as long as you live in your home. The money can be used for anything, including living expenses, home repairs and renovations, medical expenses, credit card debt, education, or travel. If you have an existing mortgage, the lender will require that part of the reverse mortgage be used to pay off the balance of the existing mortgage.

In a regular mortgage, your monthly payments reduce your total debt until it is paid off. In a reverse mortgage, your total debt increases as the lender gives you more money. Reverse mortgages are rising-debt loans; meaning that the interest is added to the principal loan balance each month. Since the interest is not paid on a current basis, the total amount of interest you owe increases significantly with time as the interest compounds. With a reverse mortgage, you retain title to your home, so you remain responsible for payment of the taxes, repairs and maintenance.

With a reverse mortgage you can never owe more than the value of the home at the time the loan is repaid. Reverse mortgages are “non-recourse” loans, which means that if you default on the loan or it cannot otherwise be repaid, the lender cannot look to your other assets to meet the outstanding balance on your loan.