How Does a Reverse Mortgage Work?

Author: Gary Corriveau

A Reverse Mortgage is the opposite of a regular mortgage. A Reverse Mortgage allows you to monetize a portion of your equity, without mandatory principal and interest payments. A simple way to think of it is that you are taking out a loan in installments (or all at once), using your home as both the security for the loan and, in most cases, the asset that will eventually fund paying back the loan.

With a Reverse Mortgage, the lender advances you (the homeowner) a cash amount. This is to be repaid when the mortgage comes due. You do have options to repay principal and interest, but if that is not part of your plan, that is fine. It is important to know that much like other loans, when interest isn’t paid, the total balance goes up (accrues) rather than down, as is the case with a standard amortizing mortgage.

With a Reverse Mortgage, your unpaid mortgage balance increases. However, this may be partially offset if your home appreciates over the same time period.

It is important to note that reverse mortgage lender liens are registered in a similar fashion to traditional mortgage financing. You continue to retain homeownership and title to your home. As such, you are responsible for the maintenance of the property, including the payment of property taxes, condo fees, and fire insurance.