A reverse mortgage is one in which a bank pays you in exchange for an interest in your home.  It can be best illustrated by an example.  If your home is worth $400,000 and you owe $50,000 on it, you have $350,000 in equity.  Banks are willing to pay cash in exchange for an interest in your home.  Here are your options: (1) you could take a lump sum for up to approximately $250,000 (the exact amount is a percentage of the equity in the home); (2) you could receive monthly payments for a set period of time or for the period of time in which you reside in the home; (3) you could set up a line of credit that you can be tapped when needed for up to $250,000 (again, the specific amount depends on the lender).  Up to now, with the exception of the regular payments, it sounds like a traditional loan or line of credit, but here is the difference...the loan, as long as you stay in your home, is never paid back.  Interests accrues on the outstanding amount you have taken as a lump sum, monthly payment, or the balance of the credit line.  However, if you remain in the home until you pass away, the bank can never get more than the value of your home as repayment of the loan.  

The amount of money you can get depends on several facts and decisions: (1) the reverse mortgage program you select; (2) the amount of equity in your home; (3) your age.  Specifically, some reverse programs are more expensive than others, the more equity you have in your home the more you can get, and the older you are, the more you can get.

The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

But if your loan balance ever exceeds the value of your home, the debt is limited by the value of your home. In other words, you can never owe more than what your home is worth. The lender may not seek repayment from your income, your other assets, or from your heirs.  This is known as a non-recourse loan. 

All reverse mortgages are due when the last surviving borrower dies, sells the home, or permanently moves out of the home. A permanent move is one in which neither you nor any other co-borrower has lived in your home for one continuous year.

Reverse mortgage lenders can also demans repayment at any time if you: (1) fail to pay your property taxes; (2) fail to maintain and repair your home; or (3) fail to keep your home insured.

These are fairly standard "conditions of default" on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances and using the difference to pay these obligations. This is only an option, however, if you have not already used up all your available loan funds.

There are a few other conditions in which the lender can demand the note: (1) your declaration of bankruptcy; (2) your donation or abandonment of your home; (3) your perpetration of fraud or misrepresentation; (4) if a government agency needs your property for public use (for example, to build a highway); or (5) if a government agency condemns your property (for example, for health or safety reasons).

Certain changes can make reverse mortgages payable, such as: (1) renting out part or all of your home; (2) adding a new owner to your home's title; (3) changing your home's zoning classification; or (4) taking out new debt against your home.

You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due.