WHAT IS A REVERSE MORTGAGE?

Homeowners who are 62 or older to convert home equity into cash through reverse mortgage. The lender makes payments to you instead of you making payments to your lender— the "reverse" of how you'd normally pay a traditional "forward" mortgage.

Reverse mortgages are popular as a retirement planning tool for homeowners who have significant equity in their homes — or own their properties outright — and want flexible access to their home equity. However, homeowners will pay more in borrowing costs, and reverse mortgage rules make it clear they're still responsible for ongoing expenses.

How does a reverse mortgage work?

A reverse mortgage works by using a portion of your home equity to first pay off your existing mortgage on the home – that is, if you still have a mortgage balance.

You are not required to make monthly payments on the reverse mortgage because the loan balance doesn’t come due until the final borrower moves out of the home, passes away, fails to pay taxes or insurance, or neglects to maintain the home.

While you are not required to make monthly payments, doing so could reduce your monthly interest or prevent it from accruing altogether. If you choose not to make a monthly payment on the loan, interest for that month will get added to the total loan balance.

After paying off your existing mortgage, your reverse mortgage lender will pay you any remaining proceeds from your new loan. If you own your home free and clear, you’ll receive all of the proceeds from the loan since you do not have a mortgage balance to pay off first.

As the homeowner, you get to choose how you want to receive your funds.

You have more choices for how you can convert your equity into cash. Instead of making payments each month, you can choose from one or a combination of the following six ways to tap your equity:

Lump sum

This option involves a single large payment made to you after your loan closes, allowing you to pad your cash reserves to use as needed. An added bonus of this choice: Your interest rate will be fixed.

Tenure

You can choose regular monthly payments for as long as you or a co-borrower live in the home as your primary residence.

Term

If you need a few years’ worth of extra income, this option lets you choose a set number of months you’ll receive regular monthly payments.

Line of credit

If you prefer an extra cushion to cover unexpected expenses as you age, the line of credit option may be a good fit. It works similar to a credit card or home equity line of credit (HELOC), giving you access to cash as needed up to the available balance.

Modified tenure

Choose this option if you want to set up a line of credit in addition to receiving a monthly payment amount for as long as you and a spouse or co-borrower live in the home.