A “reverse mortgage” allows you to trade equity in your home for cash, access to cash through an equity line of credit, or a monthly income, that you never have to pay back. You can use your current home or buy a new home or even a vacation home using a reverse mortgage.

Got your attention?

The catch—you have to be 62 or older. But hang on, kids, there are potential advantages for you too, if you’re on the good side of, ahem, those “mature individuals distinguished by their vast experience.”

Reverse mortgages, or as FHA calls them, Home Equity Conversion Mortgages (HECM), have been available for seniors for many years. The basic deal was that they use the equity in their primary residence as a source of cash, they can live in the home as long as they want without paying anything back, and the mortgage is paid off when the home is sold, with the owners or the estate getting the difference. If there isn’t enough money from the sale for the payoff, FHA eats the difference, not the estate or heirs.

Now comes the HECM for Purchase Program. The FHA developed the program because it saw that seniors were selling their homes, buying smaller, more affordable homes and then taking out reverse mortgages on the new properties. That meant they were paying closing costs twice—first on the purchase closing, and a mortgage if they needed one, and then again when they switched to a reverse mortgage. But the new program allows seniors to buy a home directly with a reverse mortgage—paying closing costs only once. A sale of an existing home is not necessary and is not part of the transaction.

The program allows seniors to use a reverse mortgage to buy a home or a small multifamily residence, and allows them to convert some of the equity in their existing home to cash. They never have to make a single payment. Instead, they can collect monthly payments out of the equity on a tax-free basis as long as the home serves as their principal residence. If they do not sell their previous home, they could get additional income out of renting that property. Under the plan, you can choose to take the money either in monthly payments, as a lump sum, a combination of the two or even in a line of credit that you can access whenever you need cash.

This year, seniors can access up to $625,500. In 2011, unless Congress changes its mind, the amount reverts to $417,000. Most reverse mortgages range from 35 percent to 55 percent of the home’s equity.

You must agree to pay your taxes and make any necessary home repairs. No credit check or income verification is required. To qualify for the reverse mortgage, a senior, age 62 or older, must:

• Agree to live in the reverse-mortgaged house as a primary residence.
• Own the home outright or have enough equity to pay off any existing mortgages and equity lines with the proceeds from the reverse mortgage. Those with more equity may be able to access even more cash.
• Not be delinquent on any federal debt.
• Participate in a consumer information session given by an HUD-approved counseling agency or HECM counselor.

Generally, three factors will affect the amount you can borrow:

• The value of your equity (the higher the better).
• Your age (the older the better).
• Interest rates (the lower the better).

Here are some hypothetical examples of how it can work:

1. Problem—you want to buy a new one-level home for $450,000 with no mortgage payment. You cans sell your colonial in Springfield with net proceeds of $300,000. Solution—you take out a reverse mortgage on the new home for $275,000, paying $150,000 of your cash for the balance. Instead of a $150,000 mortgage to pay, and no cash, you have $150,000 in cash left to invest, and no mortgage payment!
2. Problem—you own your Springfield home worth $500,000 and want to keep it as your principal residence. You have no mortgage, or a small one. You would like to buy a $300,000 vacation condo in Ocean City, but on your teeny retirement income you can’t afford a regular mortgage on either the condo or your main home. Solution—you take out a reverse mortgage on your main home for $250,000, paying $50,000 cash from other sources for the balance. You just bought your vacation condo for $50,000, and no mortgage payment!
3. Problem—you want to keep your current home, but it needs remodeling and updating to fit your changing needs. Solution—use your equity to take out a reverse mortgage for remodeling. No mortgage payments.
4. Kids, pay attention here! Problem—you want to help your son and his family buy a new home. You could take some cash out of the equity in your own home—but you can’t afford the additional mortgage payments. Solution—use your equity to take out a reverse mortgage to gift their down payment.

One added cost to a reverse mortgage is an extra insurance premium, usually more than a conventional mortgage, which has to be paid by the homeowner to insure the lender against the possibility the homeowner lives longer than anticipated. The insurance guarantees you will never pay more than a stated amount despite increased borrowing costs over time. You can finance this premium into the mortgage itself.

Interest rates on reverse mortgages today are similar to conventional mortgages. Fixed rates I’ve seen quoted by Wells Fargo recently are 5.4% fixed, or 2.5% adjustable (monthly adjustment tied to LIBOR). Of course, since you aren’t paying it, how much can it matter?

Here is the link to the HUD/FHA site for all the straight info.