Principles and Cash Flow Expectations of Reverse Mortgages

Abstract

Reverse mortgages are relatively new instruments with some potential for enhancing the living standard and independence of the well elderly. Their importance as an incremental source of disposable income is likely to increase as demographic and political trends place increasing stress on public programs. Reverse mortgages are widely discussed, but the primary forms of these instruments and the amount of cash flow they will produce are not well understood. The types and financial characteristics of reverse mortgages are summarized. Examples establish general expectations for the level of cash inflows that reverse mortgages can generate for elderly people who own homes with modest market values. The article includes a discussion of these amounts in relation to the importance of incremental income to economically vulnerable home owners.