How do reverse mortgages work?

Reverse mortgages work by allowing homeowners who are typically aged 62 or older to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. Instead, the lender makes payments to the homeowner based on a percentage of the home’s appraised value.

Here’s a simple breakdown of how they work:
1. Loan Origination: The homeowner applies for the reverse mortgage with a lender, who assesses the home’s value, the homeowner’s age, and other factors to determine the loan amount.

2. Payment Options: The homeowner can choose to receive the loan proceeds as a lump sum, monthly installments, a line of credit, or a combination of these options.

3. No Monthly Payments: Unlike a traditional mortgage where the homeowner makes monthly payments to the lender, with a reverse mortgage, the homeowner typically does not need to make any monthly payments. The loan is usually repaid when the homeowner sells the home, moves out, or passes away.

4. Interest and Fees: Interest accrues on the loan amount over time, and fees such as closing costs and mortgage insurance may apply. These costs are added to the loan balance, reducing the equity in the home over time.

5. Repayment: When the loan is due, the homeowner or their heirs can choose to repay the loan by selling the home, using other assets, or refinancing. If the home is sold, the proceeds first go to repay the loan balance,