Finance has made great strides over the years. There are a million finance options available today. One of the most novel concepts is that of Reverse Mortgage. If you own a house and you’re old, reverse mortgage provides you with an opportunity to convert your home equity into cash! As long as you are living in the house and have not sold it, you can take a loan against equity in your home and not pay for it!

The lender makes payments to you based on a percentage of the value in your home. When you no longer occupy the house, the lender sells it and recovers money that was paid to you.

One of the most common reverse mortgages is home equity conversion mortgage (HECM). They are the only reverse mortgages issued by the federal government which limits the costs to borrowers and guarantees that lenders will meet the obligations. However, the maximum loan amount here is limited. Non-HECM mortgages offer higher loan amounts than HECM loans. They are not federally insured and they can be more expensive.

Third-party closing costs, mortgage insurance, and the servicing fee are some factors to be considered while looking for lenders. Total annual loan cost (TALC) has to be disclosed by mortgage providers to borrowers. Based on the income options selected, the actual costs of the reverse mortgage will vary. Some of the income generating options are lump-sum payouts, credit lines, monthly cash advances or a combination of any these. The credit line is an interesting feature because the amount of money available to the borrower increases over time by the amount of interest.

Borrowers have the option to select an interest rate that can change as frequently as a month or every year. The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. The annual adjustable rate is capped at 2% per year or 5% over the period of life of the loan. A monthly adjustable rate mortgage can move up or down 10% over the life of the loan.

Taking a reverse mortgage on your house will impact your state of finances currently and the legacy you can leave for your heirs. Consider costs like loan origination, servicing, and interest that you have to incur. Also, your debt increases over time due to the interest on the loan.

Research thoroughly, before taking on a reverse mortgage. Compare costs that various vendor offer and read all the documents related to it. Consider the amount of cash flow that the reverse mortgage will provide. Analyze the implications that this new source of income will have on your overall investment strategy. If all falls in line, take time to research on the offers of various companies and choose the best that suits you.