reverse mortgage basics

Reverse Mortgage Debt and Home Equity

Eligibility requirements aren’t the only way reverse mortgages differ from forward mortgages like the one you probably first used to buy your home. On a conventional forward mortgage, as you pay off debt, you build equity in your home. How does the relationship between debt and equity work on a reverse mortgage?

1. As you receive cash from the mortgage, your home equity decreases.
2. As you receive cash from the mortgage, your home equity continues to grow.
3. As you receive cash from the mortgage, your home equity stays the same.

“A” is the best answer. A reverse mortgage works the opposite of a forward mortgage: You don’t have to make monthly repayments on the loan, because you live off the equity in your home. As your loan debt increases, your equity is likely to fall unless your home’s value grows so rapidly it compensates for the amount you owe.