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A reverse mortgage allows homeowners, typically seniors, to convert a portion of their home equity into cash. Unlike a traditional mortgage where you make monthly payments to a lender, with a reverse mortgage, the lender pays you. The loan only becomes due when the last borrower moves out, sells the home, or passes away, making it a unique financial tool for those looking to access their home's value without selling.

What is a Reverse Mortgage?

A reverse mortgage is a specialized home loan that lets you convert a portion of your home equity into accessible funds. Equity is the portion of your home's value that you own outright, built up through years of mortgage payments or an increase in property value. With a reverse mortgage, you receive payments from the lender, and you generally aren't required to make monthly mortgage payments as long as you live in the home as your primary residence.

Many reverse mortgages are insured by government agencies. For instance, in the United States, where reverse mortgage loans are increasingly popular, the U.S. Department of Housing and Urban Development (HUD) insures many of these loans through its Federal Housing Administration (FHA) program.

How Does a Reverse Mortgage Work?

Instead of you paying a lender, a reverse mortgage works in the opposite way: the lender pays you. These payments can be received in several ways:

• As a lump sum.
• As regular monthly payments.
• As a line of credit that you can draw from as needed.
• A combination of these options.

The loan amount you can borrow depends on several factors, including your age, current interest rates, and the appraised value of your home. Generally, older homeowners, those with more valuable homes, and those applying when interest rates are lower may qualify for a larger loan amount.

A key feature of reverse mortgages is that the loan typically doesn't need to be repaid until you no longer live in the home as your primary residence. This could be because you sell the home, move out permanently, or pass away. At that point, the loan, including accrued interest and fees, becomes due. If your heirs wish to keep the home, they would need to repay the loan. If the home is sold, the proceeds are used to repay the loan, and any remaining equity goes to your heirs.

It's important to remember that as a homeowner, you are still responsible for property taxes, homeowner's insurance, and home maintenance, even with a reverse mortgage.

Who Qualifies for a Reverse Mortgage?

Eligibility criteria for reverse mortgages can vary by country and specific loan programs. In the United States, to qualify for an FHA-insured Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, you generally must meet the following requirements:

• You must be at least 62 years old.
• You must own your home outright or have a low mortgage balance that can be paid off with the reverse mortgage proceeds.
• The home must be your primary residence.
• You must participate in a government-approved counseling session to ensure you understand the terms and implications of a reverse mortgage.