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How Does a Reverse Mortgage Work?
A plain-language walkthrough of what a reverse mortgage is, who it is designed for, and how the money can be received.
5 min read
A reverse mortgage is a home loan designed for older homeowners. Instead of the homeowner making a monthly mortgage payment to a lender, the loan allows the homeowner to convert part of their home equity into cash, a line of credit, monthly advances, or a combination of those.
The most common program is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration. Proprietary programs, sometimes available to homeowners as young as 55, may fit higher-value properties or situations the HECM does not cover.
The amount available depends primarily on the age of the youngest borrower, the value of the home, interest rates, and the loan program. Older borrowers and higher-value homes generally qualify for a larger amount.
Any existing mortgage must be paid off with the proceeds. That is often the point: eliminating a required monthly mortgage payment can meaningfully change a retirement budget. The homeowner remains responsible for property taxes, homeowners insurance, any HOA dues, and maintaining the home.
The loan becomes due when the last borrower permanently leaves the home — typically through a sale, a move, or death.
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