Learn How a Reverse Mortgage Works

If you own a home and are in need of some cash, you can get a reverse mortgage on your home where the bank gives you money instead of taking it. Mortgages are the best and most used avenue when you consider living the American dream of owning a house of your own. 

When you get a mortgage, you are required to make payments on it for years in order to pay the bank back for the money they lent you. Then there’s a reverse mortgage, the one that you take up against the house that you already own. You may be wondering why anyone would want to do that.

Well there are a variety of reasons that someone may end up needing a loan. It could be due to sudden expenses that folks aren’t prepared for. If you are in this situation you need to learn how a reverse mortgage works to ensure you aren’t shortchanged. We’ve got that information up next.

What Is A Reverse Mortgage?

You likely know all about a regular mortgage, the one you take out to be able to finance the buying of a property. A reverse mortgage is also a loan in the end, but it is more or less a secured loan in which your house acts as a security.

The loan is taken based on the value of the house that is being reverse mortgaged and it can even be a line of credit for the owner of the house. 

The difference for this loan is that there are no monthly or annual loan payments. This is because the loan is valued against the house and it (the loan) can’t be more than the value of the house. The due date of the loan is when the owner makes a permanent move, sells the house or dies.

How Does It Work?

The first thing you want to know about how reverse mortgages work is that the borrower takes the loan against the house. The house, in essence, works as collateral in this case. This can be particularly important for senior citizens that may have most of their wealth tied up in the value of their house. 

When the homeowner dies, the mortgage is due and the value of the house is used to pay off the loan and the interest incurred from the loan. The borrower can also choose to sell the house, and the bank will take the value of the reverse mortgage and the leftover the owner keeps.  

If the heirs of the estate want to keep the house, they can also choose to pay off the reverse mortgage when the original owner passes away. 

Here’s what a reverse mortgage entails.

  • Access a small portion of your home equity.
  • The percentage used to calculate is based on the age of the youngest borrower.
  • The funds can be used for almost anything the borrower needs to get. And they (the funds) are tax-free. 
  • The remaining equity of the house is inherited by the heirs of the borrower when they pass away. 

Who & What is it For?

The loan is basically used for a number of reasons but majorly as a line of credit for the senior citizen. The seniors citizens are of course, the most ideal target for this type of loan as it doesn’t require them to make loan payments. 

The other thing about this type of loan is that the borrower doesn’t need to have good credit standing or any other of the tough measures like other loans. 

Typical Costs of the Process

Like other loans, this too has a number of charges that you have to incur. And they include mortgage insurance of 0.5%. This is a significant drop from the 1.25% previously charged. There’s also a 2% up-front premium charged on the value of the house that is being mortgaged. 


A reverse mortgage can be especially beneficial to those over 65 as it is more difficult for them to get a loan. In fact many banks will not give a loan to those over 65 years of age. A reverse mortgage can help them access funds they’ve worked all their lives for.