How a Reverse Mortgage Works

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Additional tax-free income can be used for any purpose
Choose to use a portion or all of your home equity
Pays down / eliminates existing mortgage
Retain your home ownership, pass down your home & remaining equity

Learn how a reverse mortgage works before you make a decision.

How a Reverse Mortgage Works

A reverse mortgage allows homeowners ages 62 and older to turn their equity into tax-free income. When applying for a reverse mortgage, you can choose to receive the funds in a fixed monthly payment, upfront cash or a line of credit. Most borrowers choose a line of credit because of the flexibility. Not only is the lender responsible for sharing the total cost of the loan according to the Truth in Lending Act, but each applicant is required to receive HUD approved counseling discussing their options and the cost of borrowing prior to taking out the loan. A reverse mortgage using the equity in the home to pay of the debt of the home, therefore eliminating the need to make further mortgage payments. It is paid back upon leaving the home, whether by the sale of the home or through private funds. The repayment obligation can never exceed the value of the home, or the lender or federal government is required to cover that gap.

A reverse mortgage can be used for anything. There are no medical requirements, income or credit requirements to be eligible for a reverse mortgage. There should be some equity built up in the home. The home can be a single family residence, a two to four family residence, condominium or town home.

Reverse Mortgage vs. a Home Equity Loan:

Although a reverse mortgage sounds a lot like a home equity loan, there are some major differences. First and foremost, with a reverse mortgage the youngest borrower must be 62 or older. For a home equity loan, there are no age minimums.

With a home equity loan, you make monthly payments. A reverse mortgage does not require monthly payments and does not have to be paid back until you permanently leave the home. The amount you can borrow with a reverse mortgage is usually much greater.

A home equity loan you receive as a credit card or check, and you receive the entire amount at once. With a reverse mortgage you can choose to receive the amount at once, via a monthly payment or have access to the money through a line of credit.