Americans have learned a tough lesson: Your home is not your piggy bank. However, there is a reward for those who did build equity in their homes: In their senior years, their home can provide a monthly stream of tax-free income, or a lump sum of cash to spend as they wish, while remaining safely in their home. Or it can provide a source of financing for a new, smaller home.

It's all done through a reverse mortgage.

For many seniors, a reverse mortgage is the answer to a prayer. It allows you to withdraw money from your home equity, tax free, with no requirement that it be repaid until you die or move out of the home. There is no way you can be forced out of your home as long as you keep paying your property taxes and insurance and maintain the property.

Reverse mortgage basics

First, let's look at the basic reverse mortgage that can be used by people age 62 or older who have paid off their mortgage completely or have only a small balance remaining. A participating lender, such as a bank or mortgage company, will process the paperwork and give you a choice of ways to receive the money:

-- You can take out one lump sum.

-- You can get a fixed check each month for as long as you live in your home.

-- You can opt for a fixed check for a set number of years, perhaps just long enough to pay off your vacation condo.

-- You can get a line of credit against the equity in your home, which you can draw down as needed.

The Federal Housing Administration insures these mortgages, which means your future stream of monthly checks or line of credit funds is guaranteed to continue as long as you live in the home.

The size of your lump-sum distribution or lifetime monthly check is determined by three factors: the current appraised value of your home, your age and the current level of interest rates. The maximum amount of home equity that can be tapped for a reverse mortgage is $625,500 (through 2009).

For many people, it's difficult to conceive of taking money out of your home without having a liability to make payments on that debt. And federal regulations require you to be counseled by an independent adviser so that you will understand how this product works. Continued...