History

• Bank deregulation in the 1980s may have ultimately resulted in systemic weaknesses in the financial industry that allowed the housing meltdown of 2007 to occur, but it also opened the door to varied and progressive mortgage products, such as the reverse mortgage. The Garn-St. Germain Depository Institutions Act of 1982 lifted the restriction that limited banks to issuing only fixed-rate, fully amortizing, traditional mortgages. In 1986, Congress authorized a Federal Housing Administration pilot program to sponsor a reverse mortgage program -- essentially a mortgage with accrued interest charges instead of required interest and principal payments. A reverse mortgage allows seniors to draw home equity, without having to repay their obligation, while they remain in their homes. By 1989, the program had been made permanent and was available nationwide.
  
  

Loan Types

• FHA-insured reverse mortgage proceeds are available with a lump sum payment, a monthly payment or an equity line. The borrower must repay any existing loans on the property at, or before, the loan closing; the borrower can pay off existing loans using reverse mortgage proceeds.
  
  The borrower can take the lump sum option with either a fixed interest rate or an adjustable interest rate. Monthly payments and equity line options are only available with an adjustable interest rate. The borrower can also mix the proceed distribution type, which might result in having part of the loan subject to a fixed rate and part subject to an adjustable rate. (Reference 1)
  
  

Loan Amounts

• The lender determines the maximum loan amount based on a formula that considers the borrower's age, home value, loan type and interest rate. As of January 1, 2011, the maximum loan amount was $625,500. If all other variables are identical, the fixed-rate lump sum amount will be substantially more than the maximum lump sum amount allowed with an adjustable rate. For example, a 62-year-old with a $250,000 home could take out a $146,000 loan with a fixed interest rate, but only a $117,000 loan with an adjustable rate, as of January 2011.
  
  

The Most Popular Loan

• According to a 2009 study on reverse mortgages by the Federal Reserve Board, by far the most popular loan type for FHA reverse mortgages is the equity line, which is subject to an adjustable interest rate. The equity line has a unique feature other options do not. While the maximum loan amount is fixed when you first take out the loan, the unused portion increases monthly by .5 percent more than the interest rate you pay on the loan proceeds used.