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

In a traditional mortgage, the bank may lend up to 90% of the property’s value to the homeowner and expects that the homeowner will use their income to pay down the debt over time. With a reverse mortgage, the lender loans less (usually 60%) and expects that the reverse mortgage balance will grow over time because the homeowner is not making payments.

A reverse mortgage generally does not require repayment until the last homeowner has passed away or moved out of the property. Consequently, life expectancy is a huge part of the lender’s calculation of how much to lend. That is why a 62 year old can borrow a substantially lower percentage of their property’s value than an 80 year old.

Example Scenario

• A 70-year old single man owns a $200,000 property free and clear
• He is eligible for $120,000 from a reverse mortgage
• He wants to take out $40,000 initially (including fees) and then $5,000 per year for the next nine years.
• When he passes away, his heirs intend to sell the property
  • • The homeowner spent $85,000 in proceeds from the reverse mortgage
    • Total accumulated interest over the life of the loan was $38,045
    • The estate sell the home for $200,000
    • The estate uses the proceeds of the sale to repay the reverse mortgage balance of $123,045
    • The estate inherits a net amount of $76,955

  Time	Cash withdrawals	Interest accumulated (at 5%)	Reverse mortgage balance
  Initial	$40,000	$2,000	$42,000
  Year 1	$5,000	$2,350	$49,350
  Year 2	$5,000	$2,718	$57,068
  Year 3	$5,000	$3,103	$65,171
  Year 4	$5,000	$3,509	$73,679
  Year 5	$5,000	$3,934	$82,613
  Year 6	$5,000	$4,381	$91,994
  Year 7	$5,000	$4,850	$101,844
  Year 8	$5,000	$5,342	$112,186
  Year 9	$5,000	$5,859	$123,045
  Total	$85,000	$38,045	$123,045

  After ten years, the homeowner has passed away and the estate inherits the property.