How Do Reverse Mortgages Work?

Before you can truly understand reverse mortgages and the way they work, it is useful to know what home equity is. Home equity, also known as real property value, is the market value of the homeowner’s interest in the home. In other words, home equity is the difference between the fair market value of the home and the outstanding balance of all liens on the respective home.

Reverse mortgage loans, also known as lifetime loans for seniors, are types of loans that will allow older individuals to turn home equity into cash without those pesky tax implications. Plus, they get to retain the ownership of their home. Reverse mortgages do not involve any monthly payments and the repayment of the loan is deferred until the person borrowing the money is no longer living in the house. Of course, once the loan becomes due, it will need to be paid in full, plus any interest and additional closing costs. Still, thanks to the lack of payments made on a monthly basis, the amount owed tends to grow as time passes by, and the equity remaining after selling the property and paying off the respective loans tends to get smaller.

Reverse mortgage loans are so popular and advantageous to homeowners because they’ll never pay more than the exact value of their home. Another advantage is that the borrower can continue to live in their home. They’ll pay for the taxes, repairs, insurance and other costs just like a regular homeowner. The disadvantage is that failure to pay these payments can translate into a due loan that will become fully payable.

Borrowers who take advantage of this loan cannot have any other types of loans on the house. In other words, if the house already has a mortgage, this loan has to be paid off using proceeds from the reverse mortgage. Nevertheless, another great advantage of getting a reverse mortgage loan is the option of borrowing more money as the borrower grows older and the home value increases


The main eligibility conditions a borrower needs to satisfy are the following: he or she must be over 62 years of age, must own the property outright and also occupy the residence the majority of the year. A HUD Counseling Session is usually mandatory and borrowers need to attend these sessions and get counseling either by phone or in person