What Is a Reverse Mortgage?

Have a lot of home equity, but are short on cash? A reverse mortgage is a way to turn the value of your home into an income stream without having to sell the property or repay a loan every month.

You can think of it as a mirror image of a regular mortgage – you borrow against your home’s value, but instead of you paying the bank, the bank pays you – and the bank, not you, owns the home at the end of the deal.

Here are the nuts and bolts: you must be 62 or older to qualify for a reverse mortgage. Once you sign, you get to draw down your home equity without repaying it as long as you stay in your house. You get the money up front, but the interest is deferred until you move out (in most cases, when you move to a nursing home or die).

Reverse mortgages also come with some significant downsides, however. One is that the amount of equity you can pull out is far less than with a traditional mortgage. For example, an 80-year-old Chicagoan with a house worth $400,000 would probably be able to borrow only about $195,000.

And the younger you are, the less you can borrow because it will be longer until the loan is paid back. So a 65-year-old in the same situation would get perhaps $160,000. Reverse mortgages are also expensive. So it’s crucial to make sure there aren’t cheaper ways to get the money you need.