A reverse mortgage is a loan that allows eligible homeowners age 60 or older to borrow money against the equity in their home and receive the proceeds as a lump sum, a fixed monthly payment, or a line of credit. Unlike a regular mortgage—the type used to buy a home—a reverse mortgage doesn't require the homeowner to make any loan payments during their lifetime. Instead, the loan becomes due when the borrower dies, moves out permanently, or sells the home.
Reverse mortgages can provide much-needed cash for older people whose net worth is mostly tied up in their home equity—the home's market value minus any outstanding home loans. But these loans can also be costly and complex, which makes them more suitable for some homeowners than others.
Key Takeaways
• A reverse mortgage allows homeowners age 60 and older to tap into their home equity without having to sell the home.
• Reverse mortgages don't require monthly payments. Instead, the interest accumulates and the loan is paid off when the homeowner dies or moves out.
• Homeowners can take their loan proceeds as a lump sum, a series of payments, a credit line, or some combination of those.
• Reverse mortgages can be expensive and are not for everyone.
How a Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments (we'll explain the choices in the next section) and also keeps the title to the home. Over the loan's life, the homeowner's debt increases and their home equity decreases.
As with a regular mortgage, the home serves as collateral for a reverse mortgage. When the homeowner moves out or dies, the lender can sell the home to recoup the reverse mortgage's principal and interest. Any sale proceeds beyond what the lender is owed go to the homeowner (if still living) or the homeowner's estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage themselves so that they can keep the home.
Federal government rules require lenders to structure the transaction so that the loan amount won't exceed the home's value. Even if it does, such as through a drop in the home's market value or if the borrower lives longer than expected, the borrower or borrower's estate won't be held responsible for paying the lender the difference.