Senior Resources » What is a Reverse Mortgage and How Does it Work?

What is a Reverse Mortgage and How Does it Work?

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For seniors living on a fixed income, and in need of some financial help, a reverse mortgage can be a great option. Available to homeowners over the age of 62, a reverse mortgage is a type of loan that allows those with considerable equity to borrow against the value of their home.


How does a reverse mortgage work?

Basically, the lender pays money to the homeowner instead of the homeowner paying money to the lender. Payments can be received as one lump sum, fixed monthly payments, or as a line of credit. These payments are usually tax-free and are not required to be paid back until the home is later sold. As the homeowner receives payments from their reverse mortgage, interest is accumulated and rolled back into the loan balance. When the homeowner dies or sells the home, proceeds are used to pay back principal, interest, insurance, and fees.

With this type of loan, the amount owed goes up over time. This is because interest and fees are added throughout its duration. As the loan balance increases, home equity decreases. Interest and fees can add up quickly, so be careful!


Even though the homeowner doesn’t have to make monthly payments, a reverse mortgage is still a loan. As such, it comes with responsibilities. Property taxes and insurance must still be paid. If not kept current, it’s possible for the loan to come due. Also, since the home is sold for loan repayment, it will still need to be regularly maintained. This means that if you’re living in a long-term care facility, your family may need to help out.

What are the benefits?

If you’re a senior who needs help paying monthly bills or funding long-term care, a reverse mortgage can provide that assistance. A person does not need a good line of credit to qualify and won’t have to make monthly loan payments, so it’s a favorable option for some quick cash.

A reverse mortgage is one of the only ways to access home equity without first selling a property. This makes reverse mortgages an enticing option for seniors who do not qualify for a home equity loan or cannot make monthly payments.

Related: 5 Thrifty Tips For Inexpensive Senior Living


How do I find a lender?

Though it has plenty of advantages, taking out a reverse mortgage can be expensive. The accumulation of interest and fees over time quickly adds up and can leave heirs to a home in a difficult situation. Reverse mortgages can be great for the borrower; however, they can put the heir in a difficult financial situation if the homeowner fails to inform them of the loan. It is important to shop around with various lenders before deciding. Also, consult with a financial advisor. Bob Carlson’s Retirement Watch is a great place to start your research!

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Originally published March 14, 2022


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