A reverse mortgage is a transaction in which a lender provides funds to a homeowner. Unlike a traditional mortgage the "lender" may have the right to purchase the house at a specified time period or if certain conditions occur. A reverse mortgage provides a homeowner, especially an elder home owner, an opportunity to extract spendable cash from their otherwise non liquid housing asset. Many of these transactions are consummated by elderly taxpayers looking to obtain funds to supplement the "income" (cash flow) in later years. Because reverse mortgages are still relatively new, careful consideration should be given to understanding the nature and structure of the transaction and the implications of it. Also, in evaluating a reverse mortgage the range of other options available. This might include a sale of the house to heirs (e.g., children), sale of the house using the home sale exclusion and a scale down to a smaller residence, sale of the residence using some of the proceeds to purchase a charitable gift annuity, and so on.
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