How Does a Reverse Mortgage Work

A reverse mortgage, like a traditional mortgage, is a loan made by a lender to a homeowner using the home as security or collateral.

With a traditional mortgage, the homeowner uses their income to pay down the debt over time. However, with a reverse mortgage the loan balance grows over time because the homeowner is not making monthly mortgage payments.

A reverse mortgage loan typically does not require repayment until the last homeowner has passed away or has moved out of the property. Consequently, life expectancy is a huge part of the calculation in regards to how much money the borrower will receive. In general, the older you are, the more equity you have in your home and the lower your mortgage loan balance; the more money you can expect from a reverse mortgage loan.

Example of How a Reverse Mortgage Works

John and Anne are a retired couple, aged 72 and 68, who want to stay in their home, but need to boost their monthly income to pay living expenses. They would like to take a belated honeymoon. They have heard about reverse mortgage loans, but didn’t know the details. They decide to contact a reverse mortgage advisor to discuss their current needs and future goals.

John and Anne meet with an FHA appraiser, who determines that their home’s value is $300,000. They currently owe $35,000 on their mortgage.  Below is an illustration of how John and Anne spend their loan proceeds.*

Reverse Mortgage Chart

*The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements.  In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance.