A reverse mortgage is a financial product offered by lenders like banks that gives a homeowner of age 62 or older money in exchange for an equity stake in the home. Trading away a home's equity with a reverse mortgage can be risky as it erodes wealth, but reverse mortgages can be useful in the right circumstances.

Fixed Income

The traditional buyers of reverse mortgages are retired homeowners on a fixed income who are having trouble surviving or living up to the standard that they desire. Retired workers typically have paid off their original mortgages making them prime candidates for reverse mortgages. Retirees often plan on earning a certain return on investments and a certain amount of money coming from pensions or Social Security for retirement, but if expenses increase unexpectedly or other sources of income fall short, extra money may be necessary to get by. Taking out a reverse mortgage can help in this circumstance. But the equity of a home will not last forever, so if the homeowners live long enough, the income stream will dry up and they will lose the equity of the home. Another consideration is that when the homeowner dies, the heirs must repay the value of the equity owed. So by taking out a reverse mortgage, inheritance can be diminished significantly.

Unexpected Expenses

Another potential use of a reverse mortgage is to gain access to a large amount of capital to pay for a large, unexpected expense. Many seniors choose to work past the age of 62, but even with a steady income a sudden expense, such as a large medical bill or money for a child or grandchild's education, may present a need that cannot be fulfilled otherwise. After the reverse mortgage is taken out and the expense is paid for, the mortgage can be paid back over time just like a normal mortgage, or small payments can be made to stave off growth of the debt from interest, maintain the size of the debt owed until the home is ultimately sold or the homeowner dies. The danger with reverse mortgages is that if gone unchecked, interest accrual will eventually eat up all the equity held by the homeowner, so they should only be used after performing extensive research.

Investments

Some people claim that using a reverse mortgage can be a good way to make money by gaining access to capital to put into other investments. While it is true that it is possible to make a return on investment by taking out a reverse mortgage for investment purposes, the costs of the mortgage and the interest will very likely negate any gains that can be made with the capital. And if the investments don't pan out, it can result in a large financial loss. Using reverse mortgages with the intent to gain access to investment capital should be avoided.

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