There are plenty of benefits to the retirement years, one of which is the ability to finally enjoy the time that was so limited during the years of building a career and raising a family. The catch 22 is that along with the extra time retirement offers there is often less money with which to enjoy that time. One of the largest sources of available funds to tap into during the retirement years is home equity which can be accessed and enjoyed thanks to reverse mortgages.

How reverse mortgages (RMs) differ from home equity loans

RMs are one of the fastest growing home finance products today and with good reason. Unlike home equity loans, mortgages of this type don't require the homeowner to pay on a new loan. That's right, no payments ever. RMs are only available to those aged 62 and over and become payable only when the homeowner permanently leaves the residence. This would occur if the home was sold, or upon the death of the homeowners.

With a traditional home equity loan, the borrower goes through the entire home loan process including getting a credit check and signing on the dotted line to repay a large sum of borrowed cash. Reverse mortgages are just the opposite. There's no traditional credit check or repayments with RMs, because homeowners are using the equity they have already accumulated.

Tax implications of reverse mortgages and home equity loans

Another reason why the number of RMs increased more than five-fold between 2001 and 2005 is that homeowners aren't required to pay taxes on the money they receive from these mortgages. Money disbursed through reverse mortgages are equity as opposed to income, meaning that RMs don't have any impact of the amount of social security a retiree will receive. They have no impact on Social Security, Medicare or SSI. They also provide an excellent source of tax free money.

Accessing cash: reverse mortgages vs. home equity loans

With a home equity loan, homeowners generally have access to a percentage of their home's appraised value less the balance owed on the existing mortgage. A home equity loan may initially offer a higher percentage of the home's value, but only because payments are made each month that keep the loan balance level.

Reverse mortgages work differently. There are no monthly payments of any kind, as long as you continue to live in the home. Interest that accrues is deferred. A RM line of credit actually earns interest on the unused portion of funds. The current yield on the FHA monthly program is about 6.5%. With RMs, homeowners can get more spending money over time than with traditional home equity loans.