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A reverse mortgage is a type of mortgage loan that is aimed at older homeowners, usually aged 62 and above. Like most mortgages it allows the borrower to receive funds based on the value and equity of the home or property in exchange for a lien. Unlike other forms of mortgages, monthly mortgage payments are not required as long as the owner continues to reside in the property. Instead, the loan must be repaid when the owner moves out, sells the property, or passes on.
In a reverse mortgage, the borrower can decide the terms of payment. They can choose between a lump sum, monthly payment, a line of credit similar to a HELOC, or a combination of the above.
Because there are no monthly payments in reverse mortgages, interest payments work slightly differently. The interest payments are added to the loan balance on a monthly basis. In certain cases in which a property loses value or the owner resides in the property for many, many years the loan balance can exceed the home’s value. This is rare, however, and in certain countries and regions, such as Canada the loan cannot exceed the home’s fair market value legally.
Reverse mortgages are most commonly used to assist the elderly in receiving extra monthly funds for living costs. They are also frequently used for renovations, fund age care or to help out their children or grandchildren. Others may choose to use a reverse mortgage to expand a property portfolio at times.