Excerpted from The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income
by Tom Kelly

We often are caught by oxymorons, redundancies and contradictions in terms in our casual conversations with friends and family. Youngsters have been known to describe themselves as being totally dead when their parents discover they have broken a weekend curfew. The lending industry has its curious monikers, too, and reverse mortgages make the Top-10 List of Terms Needing a Better Name.

It's not really a reverse mortgage, is it, if it helps me buy my next home? inquired an elderly woman to a radio talk show program. Wouldn't you think it would be more correctly named if it were a full-circle loan.

Let's consider the three major reverse mortgage programs and their curious names and options the Home Equity Conversion Mortgage (HECM) plus the Fannie Mae Home Keeper loan and Financial Freedom's Cash Account, a proprietary jumbo reverse mortgage product. The type of loan chosen also affects the size of a reverse mortgage. The Home Keeper (an interesting label for a loan who's best feature is buying, not keeping) and the Cash Account (not really an account at all) work best for more expensive homes. Each program has its on target market and more programs probably will surface as lenders discover the dizzying number of potential customers and their reasons for wanting to tap tax-free home equity.

"It really is a conversion mortgage," said Mike Broderick, veteran reverse mortgage specialist for Reverse Mortgage of America "The name fits. Sometimes when you say 'reverse' the eyes start to wander."

Reverse mortgages are called so because instead of making mortgage payments, the borrower actually receives money from the lender. The source of funds for the money received is the equity you have stored in your home. Unlike the loan balance of a conventional mortgage, which becomes smaller with each monthly payment, the loan balance of a reverse mortgage grows larger over time. The loan principal increases with each payment that you receive, and interest and other charges accrue each month on the total funds advanced to you to date.

All reverse mortgages allow you to retain ownership of your home, and many do not require repayment for as long as you live in your home, pay your property taxes and hazard insurance charges, and maintain the property. When you leave your home permanently - upon your death or when you move away - your loan balance becomes due and payable. Your legal obligation to repay the loan can be no more than the market value of your home at the time you leave the property. This means that your lender cannot require repayment from your heirs or from any asset other than your home. This is what is known as a non-recourse loan. And, before we get into specific plans, let's consider the basics.

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Tom Kelly is a real estate columnist and radio show host with 33 years of experience as a professional journalist. Tom also authored five books focusing on second homes, mortgage options and retirement possibilities. He targets Baby Boomers and Retirees, providing consumer tips and helpful hints as well as explaining concepts and terms in a friendly, understandable style. His award-winning and nationally syndicated radio show "Real Estate Today" provides on-air advice to callers. Learn more about Tom.