How Does a Reverse Mortgage Work?

You may be wondering, "How does a reverse mortgage work?" A reverse mortgage can provide a homeowner with much-needed funds in the later years of life, often to pay for services needed to aid him or her in staying in the home. This special type of loan is usually reserved for people over the age of 62 and allows the homeowners to trade equity for cash without the worry of having to make monthly loan payments to pay it back. Monies can be distributed as a lump sum, monthly payment or credit line. The amount of money received is dependent on a number of factors, including but not limited to the homeowner's age; the value of the home and, more specifically, the amount of equity in the home; the interest rate for which the homeowner qualifies and the terms of the loan. There are no restrictions on how one uses the money unless it has been specifically designated for home repairs by the state or a federal government program--a circumstance that is an exception, not the rule.

When the owner of a home under a reverse mortgage dies, the amount due to the mortgage company immediately comes due. A person inheriting the home will need to pay the debt in full in order to maintain ownership of the home. If the heir is not able to pay off the mortgage, he or she may lose the house to the mortgage company.