For decades Americans have relied on homeownership to build wealth in the form of home equity. Once individuals have established a substantial amount of equity by making monthly payments and reducing the principal balance of a loan, the financial scales will tip in their favor allowing them to tap into multiple types of credit opportunities. Some options include a home equity line of credit (HELOC) or a standard home equity loan and for aging Americans, reverse mortgages are the most popular selection.

Reverse mortgages are a unique type of loan agreement that allow consumers to access the money they have invested into their home while empowering them to stay put on the property. Consumers are hearing more about reverse mortgage opportunities as baby boomers (individuals born during the post World War II baby boom) are entering retirement age, and many of them are choosing to stay put and age directly in the homes where they built their lives. Here is what home owners need to know about the opportunity.

History of Reverse Mortgage Industry

Mortgage rate origination tool Mortgage Marvel, defines a reverse mortgage as "A special type of mortgage that enables seniors to convert the equity in their homes into a monthly income stream. Also known as a Home Equity Conversion Mortgage (HECM)". Courtesy of the volume of activity in the sector fueled by the slew of Baby Boomers entering retirement age, some individuals think that reverse mortgages are a completely new creation, however, the fact is the unique loan opportunity has been around for decades.

The very first reverse mortgage was issued to Nellie Young by the Deering Savings and Loan of Maine in 1961, and the sector only picked up steam once the Federal Housing Authority Insurance Program was made law in 1988. It was during that time period that the American Association of Retired Persons (AARP) worked directly with the Federal agency to create the financial product. The program first kicked off with a trial involving 50 national participating lenders and based on that opportunity, the first government backed reverse loan was issued in 1989. The government specialty grew in popularity and in 1998, private lenders started getting into the action and allowed more home owners to take advantage of the opportunity.

Qualified home owners interested in securing a reverse mortgage will tap into the equity of their home and can either choose to receive a lump sum advancement or choose a monthly distribution schedule. The loan repayment plan is deferred until the owner dies, the home is sold, or the owner leaves to move into assisted living.

Reverse Mortgage Qualifications

Even though a reverse mortgage may sound tempting to many segments of the nation's population, the opportunity has been specifically crafted to assist aging Americans. In order to qualify for a reverse mortgage, certain non-negotiable requirements need to be met including:

• Loan participants must be a minimum of 62 years old.
• Only primary residence of homeowners can be used for the secured loan opportunity.
• The property's mortgage must be in good standing and can only have a small outstanding balance due or the principal must already be paid in full.
• Reverse mortgages will only be issued on single family detached homes, townhouses or condominiums.

Once those qualifications are met, the amount of the reverse mortgage will fluctuate based on age, home value and interest rates.

For some, opting into a reverse mortgage is an excellent way to fund retirement or even stave off foreclosure. Like any financial instrument, there are risks involved and AARP, the developers of the first products, recommend that borrowers explore all other potential revenue streams before tapping into a reverse mortgage to minimize dangers and high-costs associated with the loan. Before making a loan commitment, AARP encourages consumers to ask themselves:

• Is a reverse mortgage needed or would another option suffice?
• Are the costs associated with securing a reverse mortgage affordable?
• Is the loan timing in sync with future goals and expenses?
• Is there a Less Expensive Loan Option Available?
• Do you fully understand how reverse mortgages work?

Risks Associated With Reverse Mortgages

For those who do qualify for a reverse mortgage opportunity and can afford the expenses associated with the loan, there are still plenty of traps and risks of the product. Some of the most common ones are:

• Up-front expenses are large. According to AARP the loan origination fees can go up to $6,000 and there are additional fees that can add thousands of dollars more to the expense.
• Interest debt is compounded and keeps accruing until the loan is repaid.
• Lenders may require mortgage insurance to cover the debt.
• Property taxes and general home maintenance are still the financial responsibility of the borrower.

Reverse mortgages opportunities are abundant, but despite the ease of securing one, consumers need to fully evaluate all the risks involved before signing on the dotted line.