For many Americans reaching the retirement age, the equity build up in their home is their only real asset. Reverse mortgage is a way to tap into this asset and create a stream of income needed for retirement or take care of an unexpected financial need that is usually related to health care costs in the elderly.

Reverse mortgage is not like a refinance, equity loan or a second loan on your home and there are some pitfalls.

So what is a reverse mortgage? As the term implies the flow of money is reversed. Instead of the homeowner paying the lender on a predetermined schedule, the lender pays the homeowner and there aren’t any payments due until the home owner moves or dies.

How did reverse mortgage start? Roger Maris broke Babe Ruth’s single-season home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of fame and ironically these acts of kindness remain obscure.

The history of reverse mortgage can be traced to Nelson Haynes of Deering Savings & Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today’s retirees.

Reverse mortgage helps many retirees cope with their financial difficulties and more importantly,helps them to have a way to retain their independence and dignity. And retirees are reaching for this solution in record numbers. According to the National Reverse Mortgage Lenders Association in 2004, lenders originated a record 37,829 HECM loans during the most recent federal fiscal year - a 109 percent increase over the 18,079 loans closed the previous year.

Why would a lender do this? The act of kindness may have started this idea but lenders are not charitable organizations and they will not be in business long if they don’t have a return on their investments. In this case, they calculate the amount they lend based on the value of your home, projected appreciation, your age and a number of other factors. They expect to get paid the money they have lent plus the interest when the homeowner moves or dies.

What are HECM Loans? Federally-insured home equity conversion mortgage (HECM) is the most common of reverse mortgage loans that the U.S. Department of Housing and Urban Development started offering in 1989.

Who cares about federal insurance? In traditional loans, when you borrow the money, you have the cash in hand and the lender has taken all the risk secured by your home. However in a reverse mortgage, you may plan to receive a monthly payment over a period of time. What will happen if the lender is no longer around to pay you?

This is why the federally insured reverse mortgage ads another dimension of safety and peace of mind. This peace of mind also comes with a price tag. HECMs limits the maximum loan amount a homeowner can borrow.

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