A reverse mortgage is a loan available to homeowners, typically aged 62 or older, that allows them to borrow money using the equity in their home as collateral without having to make monthly mortgage payments
. Instead of the borrower paying the lender, the lender pays the homeowner either as a lump sum, monthly payments, a line of credit, or a combination of these options
. Here is how a reverse mortgage works in detail:
- Eligibility : The homeowner must be at least 62 years old and live in the home as their primary residence. The home must have significant equity and meet certain property standards
- Loan disbursement : Borrowers can choose how to receive funds-lump sum, fixed monthly payments for a set period or for as long as they live in the home, a line of credit, or a combination
- No monthly repayments : Unlike traditional mortgages, borrowers do not make monthly payments on the loan. Instead, interest and fees accumulate and are added to the loan balance over time, causing the amount owed to grow
- Repayment triggers : The loan must be repaid in full when the borrower sells the home, permanently moves out, or passes away. At that point, the home is usually sold to repay the loan balance, including accrued interest and fees
- Homeowner responsibilities : The borrower retains ownership and must continue to pay property taxes, insurance, and maintain the home. Failure to do so can lead to loan default and foreclosure
- Loan limits and protections : The loan amount depends on the homeowner's age, home value, and current interest rates. By law, borrowers or their heirs will never owe more than the home's value at loan repayment
In summary, a reverse mortgage converts home equity into cash without monthly payments, with repayment deferred until the home is sold or the borrower no longer lives there. The loan balance increases over time due to added interest, reducing home equity accordingly
