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How Does a Reverse Mortgage Work?

A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you.

But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer use the home as their principal residence.

How Much Can I Borrow with a Reverse Mortgage?

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less.

Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

You don't make payments, because the loan is not due as long as the house is your principal residence.

Can the lender take my home away if I outlive the loan?

No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.

However, there are other dangers of reverse mortgages that is important you consider before applying for one.

Will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender.

The remaining equity in your home, if any, belongs to you or to your heirs.

This is where this type of loan can get costly, because the interest rates are quite higher than other types of loans - even home equity loans.

So it is a good idea to consider other methods to get the money you need before applying for a reverse mortgage.