What is a reverse mortgage?

By Sabrina Karl

For seniors with significant equity in their home, tapping into that equity with a reverse mortgage can be appealing. But reverse mortgages are complex, and can be costly, so aren’t a good fit for everyone.

First, you must be at least 62 years old to qualify for a reverse mortgage, and must have at least 50% equity in your home. If you meet these criteria, here’s how it works.

While a standard mortgage enables you to take out a loan to finance your home and then make monthly payments on that balance over time, a reverse mortgage is so named because it does the opposite. It takes out a loan from the equity you already hold in the house and instead of you making monthly payments, the lender pays you, with the accumulated loan balance not due until a later date.

The equity withdrawals through a reverse mortgage can be paid out in a lump sum, or through monthly annuity payments for either your full lifetime or for a fixed number of years. You can also opt to just access the equity as you need it, like a home equity line of credit, and can even combine this option with a lump sum or annuity structure.

But it’s important to know that upon your death, or the sale of the house, or you ceasing to live there as your permanent residence for a year or more, your reverse mortgage balance will become due, either to you or your heirs. It will also become immediately due if you don’t keep up with your property taxes and homeowner’s insurance.

Additionally, there are fees involved, both up-front and ongoing. So it's critical to shop around and do your due diligence to find the best terms, as well as avoid scam providers.