A Gaithersburg savings and loan has become the first lending institution in the Washington area to offer a "reverse mortgage" program to elderly homeowners who want to cash in on the value of their homes while they are living in them.

The Individual Reverse Mortgage Account program, developed and funded by American Homestead Mortgage Corp. of New Jersey, pays qualified homeowners, 62 or older, a monthly payment based on the value of their home until they die or decide to sell it.

At the time of the sale, the principal and the interest -- currently 11 1/2 percent -- is due and is deducted from sale proceeds. Reverse mortgages differ from second mortgages or home equity loans in that the loans are not repaid immediately through monthly payments.

If the home's value has appreciated during the life of the loan, the bank also will claim a share of that increased value, depending on the amount of equity the homeowner tapped during the reverse mortgage period, according to Robert B. Schwartz, an officer of Standard Federal Savings and Loan Association, the Gaithersburg institution offering the program.

The rest of the sale money would go to the estate or the seller.

Since reverse mortgages became available in Maryland in February, 267 persons have applied for the program, according to Schwartz, and three have received their first monthly checks.

"It takes about six to eight weeks to process the application, do a title search, have an appraisal and a termite inspection done -- just like when you apply for a regular mortgage," Schwartz said.

Participants may opt for one lump-sum payment, instead of an annuity. Both are tax free because they are loans, not income.

Since the reverse mortgage program became available in the New York-New Jersey-Pennsylvania area about two years ago, about 500 persons have signed up for the loans, said James Burke, founder and president of American Homestead, and the man who pushed legislation authorizing mortgages in excess of 30 years through Congress in 1982.

Schwartz said most of the 267 Marylanders who have applied are widows over 70 years old whose Social Security benefits were cut by at least a third when their husbands died. "They have a pension that seemed reasonable when they retired, but just cannot meet increased medical costs and rising food prices," he said.

Burke said, "We have people who own $35,000 row houses in Philadelphia and others who own $250,000 mansions. We don't redline, and we'll consider a loan for any debt-free property.

"One man is a world traveler who owns a $500,000 house, has no children and admits to having a $60,000 income and an $80,000 life style. He says, 'Hearses don't have baggage racks, and I'd rather enjoy the money now,' " Burke said.

Several grandparents have used part of the monthly payments to help send grandchildren to college, but most are using it to cover basic living expenses, so they can keep their savings for a catastrophic illness.

"This country's elderly population represents $3 trillion in untapped equity. They are house-rich and cash-poor. . . . Why should the backbone of America have to sell off their homes to finance their old age?" Schwartz asked.

Jack Guttentag, a professor of banking at the University of Pennsylvania's Wharton School of Business who pioneered the idea of home-equity conversion in the early 1970s, said, "American Homestead's program is the only significant private one of its kind in the nation."

Guttentag said that while the Homestead "product is a good one with a fair contract," it remains "very difficult to cut a wide swath in the market. . . . People, especially the elderly, are inherently suspicious. It's a very hard sell to them. It involves their most precious possession."

Burke and Schwartz agreed and said one of the misconceptions loan officers deal with most often is the notion that the bank can force a homeowner out of his house before he is ready to leave. "The bank never owns the home, it merely has a lien on the property," Burke said.

Some children are "greedy and would rather see a parent survive on tea and toast" than touch a home's equity, Burke said. But many others brought the reverse mortgages to their parents' attention to ease cash flow.

Raymond L. DuBois, 78, a retired insurance salesman and widower who lives in New Jersey's Bergen County, said his middle-aged son and daughter encouraged him to apply for the reverse mortgage, and now DuBois is telling his friends about the loans.

"Some kids do try to talk their parents out of it, because they want the entire estate for themselves, but mine thought it was a wonderful idea," he said.

DuBois' house was appraised at $125,000 when he applied for his reverse mortgage in late 1983. Based on the home's age and condition, DuBois was told he could qualify for a monthly cash payment of between $250 and $700.

"I opted for $350, which has either gone into CDs certificate of deposit accounts and earned about 9 percent or been used for home repairs I wanted to do without touching my savings," he said.

DuBois said that when he dies, the bank will get 50 percent of the appreciated value of his house -- instead of 100 percent -- because he opted for lower monthly payments than he qualified for.

Burke said a typical scenario involves a widow, 75, who owns a house worth about $85,000. "That woman could receive $417 a month for as long as she lived," he said. If the house is worth $90,000, the payment would be $443. The owner of a $150,000 house is eligible for up to $700 a month, Burke said.

American Homestead remains the only mortgage bank in the nation to fund the reverse mortgages, although Bank One of Ohio is expected to begin the program at its 350 branches within the next few months.