A client recently asked me whether it is a good idea to get a reverse mortgage. Before I answer that question, let me explain how a reverse mortgage is different from a regular mortgage.

Most of us understand what a regular mortgage is. You borrow money from a bank. You sign a mortgage document which gives the bank the right to sell your home in a foreclosure sale if you fail to make payments. Each month you make a payment to the bank. The payment includes interest. You make payments for a set number of years, usually 30 years or 15 years. When you finish making all of your payments, the bank releases its mortgage. You own the home free and clear again.

A reverse mortgage is very different. You borrow money from a bank. You can choose to borrow a lump sum all at once. Or, you can have the bank send you a set amount of money every month. (Every payment the bank sends you is a loan on which interest is charged.) Or, you can choose to have a credit line, like a home equity mortgage, which allows you to decide when and how much money you draw, up to the amount of your approved credit. With a reverse mortgage, you do not have to make any payment to the bank until you die, sell your home, or move out of your home. The bank charges you interest, usually at an adjustable interest rate. You have to pay your own real property taxes and homeowner’s insurance premiums. To get a reverse mortgage, you have to be 62 years old or older. You can qualify for a reverse mortgage even if you have very little or no income. The amount you can borrow depends on your age, the interest rate, and the value of your home. The older you are, the lower the interest rate, and the more valuable your home is, the more you can borrow.

AARP has a website at www.aarp.org/money/revmort/ with a calculator which shows how much you can borrow. For example, if you are 65 years old and live in Honolulu with a home worth $600,000, you can either borrow a lump sum of $254,215, or receive $1,646 a month as long as you live in the home, or get a credit line of $254,215 which, if unused, increases to $364,707 in 5 years, or to $523,222 in 10 years.

With a reverse mortgage, the bank charges you interest on the money you borrow, just as it does with a regular mortgage. However, you do not make any payments while living in the home. Therefore, every month that goes by, the amount of interest you owe the bank is piling up more and more. For example, suppose that you borrow $100,000 on a reverse mortgage. Assume that the interest rate is 8% a year. At the end of one year, you owe the bank $108,000. At the end of twenty years, you owe the bank $260,000. If you die at that time, the house will be sold, the bank receives its $260,000, and if there is any money left over from the sale, it goes to the persons named in your will or trust. (Actually, there would be fees which would be added to the amount you owe.)

Should you get a reverse mortgage? If you need cash, and you don’t care about leaving an inheritance to anyone, then a reverse mortgage may be right for you. However, if you want to leave an inheritance to your children or other loved ones, then a reverse mortgage may not be a good idea. With a reverse mortgage, the interest owing to the bank builds up so much that there may be very little or nothing left for your loved ones at the end. A reverse mortgage also makes it difficult to protect your home from nursing home costs.

If you are considering a reverse mortgage, you may want to ask an estate planning specialist whether it makes sense in your particular situation.