A reverse mortgage is a type of home equity loan that’s reserved for older homeowners and does not require monthly mortgage payments. Instead, the loan is repaid after the borrower moves out or dies.

Reverse mortgages are often considered a last-resort source of income, but they have become a great retirement planning tool for many homeowners.

The first federally-insured reverse mortgage — also known as a home equity conversion mortgage, or HECM — was introduced in 1989. These loans allow people who are 62 or older to tap a portion of their home equity without having to move.

Who would benefit from a reverse mortgage

  • People that don’t plan on moving.
  • Can afford the cost of maintaining their home.
  • Want to access the equity in their home to supplement their income or have money available for a rainy day.

Some people even use a reverse mortgage to eliminate their existing mortgage and improve their monthly cash flow, says Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, or NRMLA.

Reverse mortgage basics

  • How does it work? The bank makes payments to the borrower based on a percentage of accumulated home equity.
  • When does it need to be repaid? When the borrower dies, sells the home or permanently moves out.
  • Who is eligible? Seniors age 62 and older who own homes outright or have small mortgages.
  • How can the money be used? For any reason. Retirees typically use cash to supplement income, pay for health care expenses, pay off debt or finance home improvement jobs.