Reverse mortgages provide an attractive option to many seniors by allowing them to convert home equity into cash. Cash payments can be received in the form of a lump sum disbursement, monthly payments, a credit line, or some combination of these, and can be used to supplement monthly retirement income, perform home improvements, or provide a fund for emergencies. Instead of repaying the loan by making monthly mortgage payments, as with traditional mortgages, the borrower need not repay until the home is no longer used as their principal residence. Seniors also have the assurance that their heirs will never be personally liable should the home be sold for less than the loan balance. Heirs will benefit, however, from any remaining equity once the reverse mortgage is paid off.

Interest accrues on an outstanding reverse mortgage balance over time, thus increasing the total debt amount until the loan is repaid. Therefore, negotiating a low interest rate is imperative. There are three distinct types of reverse mortgages: the "single purpose reverse mortgage," offered by some state or local government agencies, or by nonprofit organizations; "proprietary reverse mortgages," backed by private lenders; and the federally-insured HECM (Home Equity Conversion Mortgage), which is the most popular and flexible type of reverse mortgage. Though HECMs are typically more expensive with higher upfront costs, they are also significantly more flexible. Proceeds can be used at the discretion of the borrower, and HECMs do not have requirements for income or creditworthiness. Lenders may choose to discount their origination fees and/or monthly servicing fees, while still adhering to the rules and regulations governing the programs, which limit the total loan origination fee amount to a maximum of 1.5% of the total loan amount.

Reverse mortgage rates for HECM loans are set by the Federal National Mortgage Association, or "Fannie Mae," and are known as the TALC, or "Total Annual Loan Cost Rate." The TALC takes into account all costs of the loan, including finance charges, appraisal and closing fees, and mortgage insurance premiums (known as "MIP margin"). Borrowers may choose a fixed rate of interest, or a variable rate that adjusts monthly or annually. Interest rates are tied to a financial index -- typically the six-month LIBOR (London Interbank Offered Rate). The lender then adds to this index rate its fees and closing costs (increasing the rate by an average of 3.1% for fixed rate loans, or 1.6% for monthly adjustable rates), and MIP margin (currently averaging an additional 1.25%). The result is an interest rate that is typically lower than traditional home loans or home equity loans, providing much financial advantage to seniors looking for increased cash flow and flexibility.