Reverse Mortgage

Definition

A loan under which older homeowners can leverage their home’s unencumbered equity for monthly payments. In a conventional mortgage, the lender advances the entire loan principal and the borrower pays it back in monthly installments. However, in a reverse mortgage, the lender advances monthly payments of loan principal to the borrower and the borrower is not required to repay the loan until it matures, which is typically upon the borrower’s death or the sale of the home. The amount that can be borrowed is determined by the amount of equity in the home and the borrower’s life expectancy. When a reverse mortgage matures, repayment includes all loan principal advanced, interest on the advancements, and associated fees and costs. Typically, reverse-mortgage companies also receive a percentage of any increase in value of the home during the life of the reverse mortgage. The cost of repaying a reverse mortgage can exceed the benefits received under certain circumstances.