Despite its backward-sounding name, a reverse mortgage may appeal to certain forward-thinking homeowners. What is the main advantage? This type of arrangement allows you to tap into the equity in your principal residence. It is commonly used to help pay for expenses during retirement or free up cash for emergencies.

Instead of a regular mortgage where you pay the bank (or another financial institution) each month, the bank pays you on a monthly basis. That’s where the name “reverse mortgage” comes from.

Details: A reverse mortgage is essentially the rear view mirror of a conventional mortgage. Normally, when you obtain a mortgage, you receive a lump sum that is combined with your down payment. Then you repay the loan principal plus interest through installments over a period of time (e.g., 15 or 30 years).

In contrast, with a reverse mortgage, the lender provides you with monthly payments based on the home’s appreciated value. Thus, you can benefit from the equity built up in your home.

To qualify for a reverse mortgage, you must be at least age 62. If you are married, both you and your spouse have to meet this age requirement.

The actual amount you are eligible to receive each month depends upon a number of factors, including the following:

*your age and life expectancy;

*the current value of the residence;

*the amount of the total equity on the home that you are relinquishing;

*the length of the loan term; and

*the annual interest rate charged by the lender.

In general, the older you are and the more your home is worth, the more money you are likely to receive.

Extra tax mileage: Because reverse mortgage payments are considered to be payments on a loan, they are not subject to federal income tax. In addition, the payments should not affect eligibility for Medicare or Social Security benefits.

Of course, there are numerous other considerations for homeowners. For instance, be sure to check out all the costs (e.g., points, appraisal fees, etc.) that are part of the deal. As an alternative, you may also want to consider a reverse mortgage that lets you retain some of the appreciated value in your home.

Finally, assuming your home is your main asset, you may not want to be so quick to dip into the equity you have worked so hard to build up. You may also want to consult with other family members who could be affected.

Obviously, this is not a spur-of-the-moment decision. Make sure you fully understand all of the ramifications before you make a commitment.