How Do Reverse Mortgages Work?


Quick Answer

Reverse mortgages allow the borrower to receive monthly payments instead of making payments to the lender. These mortgages are available for those aged 62 or older and who already own a house with equity, notes the Federal Trade Commission. A reverse mortgage is designed to let homeowners take the equity they have built up in their homes and get cash without needing to sell the house.

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Full Answer

Those who use reverse mortgages have several options for receiving payments, including tenure, term, line of credit and lump sum payment plans, states the United States Department of Housing and Urban Development. How much money the homeowner can take out for a reverse mortgage depends on the age and condition of the home, the applicant's credit history and how much the house is appraised for.

Those considering taking out a reverse mortgage should be sure to understand how the loan will affect estate planning and disbursement after their death, the applicable fees and how the principal and interest rate works. In contrast to regular mortgages, borrower's will continue to owe more as time passes and interest rates are usually variable. The interest on a reverse mortgage is also not tax deductible. Homeowners will have to pay taxes and hazard insurance out of pocket.

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