Reverse Mortgage

A reverse mortgage is a loan product that allows a homeowner, typically aged 62 or older in the United States, to borrow against the equity built up in their home without making monthly loan repayments. Instead of the borrower paying the lender each month as with a conventional mortgage, the lender pays the borrower, either as a lump sum, a line of credit, or a stream of regular payments, and the loan balance grows over time as interest and fees accrue on the amount already disbursed.

The loan is secured by the home itself and becomes due when the borrower dies, sells the home, or no longer lives there as their primary residence, at which point the loan, including accumulated interest and fees, is repaid from the proceeds of the home's sale or from the borrower's wider estate. Because the amount available is based on the home's value and the borrower's life expectancy, reverse mortgages are underwritten very differently from a standard home equity loan, with age playing a central role alongside property value.

Instead of borrowing a lump sum and paying it back in instalments like a normal loan, a reverse mortgage flips the direction: the lender pays you, drawing down the value already locked up in your home, and the total only gets settled later, usually when the home is eventually sold or the borrower passes away.

• The loan balance, including all accrued interest and fees, is repaid when the home is sold, whether by the borrower during their lifetime or by their estate afterward.
• If the borrower dies, heirs can repay the loan to keep the home or allow it to be sold to settle the debt, depending on what they want to do with the property.
• Most reverse mortgages are structured so the borrower, or their estate, never owes more than the home is worth when it is sold, through a feature known as a non-recourse guarantee.

Because interest compounds on a growing balance with no monthly repayments, the amount owed can increase substantially over a long period, reducing the equity, and ultimately the inheritance, left in the home for heirs. Borrowers remain responsible for property taxes, insurance and maintenance throughout the life of the loan, and falling behind on these obligations can trigger default and even foreclosure even though no monthly loan payment is ever due under the product's normal terms.

Given the complexity and long-term consequences of a reverse mortgage, many jurisdictions require prospective borrowers to complete independent counselling with a government-approved advisor before a loan can be finalized, specifically to ensure the homeowner understands the trade-offs involved and has considered alternatives. This requirement exists because reverse mortgages have historically been marketed aggressively to older homeowners who may be particularly vulnerable to misunderstanding how quickly the loan balance can grow relative to the home's value over a long retirement.

Because a reverse mortgage directly affects how much value, if any, remains in the home for heirs, financial advisors generally recommend that borrowers discuss their plans openly with family members before proceeding, particularly adult children who might otherwise expect to inherit the property free of debt. Some families choose to have a relative repay the reverse mortgage balance directly in order to keep the home within the family rather than allowing it to be sold on the open market to satisfy the loan, an option that is generally available but requires access to the necessary funds at the time the loan becomes due.

A reverse mortgage is often compared against the alternative of simply selling the home and moving to a smaller, less expensive property, which releases the full value of the home immediately rather than drawing on it gradually while continuing to live there. The right choice depends heavily on personal circumstances, including whether the homeowner wants to remain in their current home and community for emotional or practical reasons, since a reverse mortgage specifically trades some of the home's future value for the ability to stay in place.