How does a reverse mortgage work?

First, the homeowner who wants a reverse mortgage must meet the age requirement and that the home must be either a single-family unit or a two-to-four occupied unit. A mobile home cannot be accepted as collateral against this type of mortgage. Then, once the home application is approved, the homeowner can chose a method on how the loan will be received. It can be released all at once or monthly. Some lenders also offer the option of having a credit line for the loaned amount.
If the chosen method of release is monthly, the lender sends in checks or deposits money in the homeowner’s bank. This is the reason why the term “reverse” was utilized. Instead of the borrower making monthly payments, the lender is the one which is sending monthly payments. And while the loan is being released, the homeowner can stay in his or her home until death or until he or she permanently leaves the home.

However, the simplicity of the process does not indicate instant approval. The homeowner-borrower must pay certain fees, such as the application fee, the insurance fee, the origination fee, the closing fee, and the interest. All these fees are added to the total loan.

At this point, the reverse mortgage loan is considered paid and the home will be sold to the lender. Since the lender has already extended a loan, the home will be sold at an extremely low price, perhaps less than 50% of the market value. If the homeowner has an heir, he or she will be entitled only to a small portion of the proceeds of the sale of the house.