Many may have heard the term “reverse mortgage” when it comes to home finance options, but how many people actually know how it works and why anybody would even want a reverse mortgage?

How Does A Reverse Mortgage Work?

Homeowners gain equity in their home as they pay off the loan. Home equity is the difference between the appraised value of the home and any debt remaining on the home in the form of a mortgage. Most Americans will have quite a bit of equity built up in their homes by the time they reach retirement age, or may even have the loan paid off in full. It will make up a major portion of someone’s personal net worth.

The Options Of Tapping Into This Equity

There are several options available for people to be able to tap into this equity. One could secure a line of credit based on the equity amount in their home. Or homeowners could take out a home equity loan. Alternatively, homeowners could also sell their home, but that then leaves them with nowhere to live, so the last option is not feasible.

So the options are:

  • Line of credit
  • Home equity loan
  • Sell the home
  • Reverse Mortgage


The Better Alternative

For the homeowner who is over the age of 62 and can meet certain criteria, the better idea would be to reverse mortgage. It’s like the opposite of a regular mortgage. Instead of making repayments to the bank, the bank actually makes payments to the homeowner, or essentially gives the homeowner a loan based on the amount of equity available in their home. These will be fixed monthly payments that can really help with covering the basic living needs of those surviving on a limited income.

Reverse mortgages certainly make a lot of sense for those in their retirement years. No more struggling to pay the monthly bills or wondering where the money is coming from. It’s an added layer of security that offers peace of mind. For people who have worked hard all their lives, they needn’t live a life of stress once they reach retirement age.