How Does a Reverse Mortgage Work? | Must Know Facts Updated for 2018

By: Tsveta van Son
Tsveta van Son
Tsveta van Son is part of Invezz’s journalist team. She has a BA degree in European Studies and a MA degree… read more.
on Aug 20, 2018
Updated: May 21, 2019

A reverse mortgage works by allowing homeowners age 62 and older to borrow from their home’s equity without having to make monthly mortgage payments.

As the borrower, you may choose to take funds in a lump sum, line of credit or via structured monthly payments.

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The repayment of the loan is required when the last surviving borrower vacates the home permanently.

How It Works: 

  • Access a portion of your home’s equity
  • Percentage is based on age of youngest borrower
  • Make no monthly mortgage repayments
  • Funds are tax-free, and may be used for virtually anything
  • Loan is repaid when you pass away or sell your home
  • Any remaining equity belongs to your heirs

How It’s Different

A reverse mortgage is different than a traditional, or “forward,” loan in that it operates exactly in reverse. The traditional loan is a falling debt, rising equity loan while the reverse mortgage is a falling equity, rising debt loan.

In other words, as you make payments on a traditional loan, the amount you owe is reduced, and therefore the equity you have in the property increases over time.

With the reverse mortgage, you make no regular payments, so as you draw out funds and as interest accrues on the loan, the balance grows and your equity position in the property becomes smaller.

There is a secret here though that I’m going to let you in on. Two, actually. There is never a payment due on a reverse mortgage, and there is also no prepayment penalty of any kind.

In other words, you can make a payment at any time, up to and including payment in full without penalty. Many borrowers choose to repay some or all the accruing interest, or whatever amount they desire. As the borrower, the choice is yours.

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