How does a reverse mortgage function?

A reverse mortgage is a financial product that enables homeowners, typically those aged 62 or older, to convert a portion of their home equity into cash. It functions by allowing the homeowner to receive loan proceeds based on the value of their home without the need for monthly mortgage payments. Instead, the loan is repaid when the homeowner sells the home, moves out, or passes away.

This mechanism provides financial flexibility to the homeowner, as they can use the funds for various purposes, such as covering living expenses, healthcare costs, or home improvements, while still maintaining ownership of their home. The loan amount is generally based on the age of the borrower, current interest rates, and the home's appraised value, which means the homeowner can access a significant amount of cash if they have built up substantial equity.

Other options do not accurately describe how a reverse mortgage works. Monthly payments are not required from the homeowner, and collateral is typically the home itself rather than other assets. Additionally, a reverse mortgage is not intended for purchasing new homes, as it leverages existing home equity rather than financing new property.