Handbook of Finance: Financial Markets and Instruments

Chapter 19. Reverse Mortgages

LAURIE S. GOODMAN, PhD

Co-head of Global Fixed Income Research and Manager of U.S. Securitized Products Research, UBS

Abstract: Reverse mortgages are instruments designed for older homeowners; they allow the equity in a home to be monetized. At the initiation of the reverse mortgage, a homeowner elects to take out either a lump-sum payment, a fixed monthly payment for life, or can have access to a line of credit. The reverse mortgage loan must be paid in full when the last surviving borrower dies, moves, or sells the home.

Keywords: reverse mortgage, home equity conversion mortgage (HECM)

Reverse mortgages are a type of residential mortgage instrument which allows homeowners to monetize the equity in their home. This chapter describes the characteristics of this type of mortgage. Reverse mortgages, while still a very small part of the U.S. mortgage market, has shown robust growth. Moreover, with changing U.S. demographics, their popularity is expected to increase.

HOW A REVERSE MORTGAGE WORKS

In a reverse mortgage, the homeowner receives cash, either as an up-front payment, as a monthly payment, or as a line of credit. That money is not taxable (technically, it is considered a loan advance, not income), and can be used to live on. It does not impact Medicare or Social Security benefits. It could potentially impact Medicaid benefits. The loan amount will depend on the age of the borrower (younger borrowers receive less money), the appraised home value, current ...