Created: October 15, 2020
Modified: January 27, 2023

Episode 21: How Does a Reverse Mortgage Work?

Thank you for joining us for Episode 21 of our Money Wisdom Question Series, where we film answers to common financial and retirement investment questions. Today’s question is, “What is a reverse mortgage?”

A few years back, there was a lot of confusion on reverse mortgages. I remember talking to my mom and dad and them thinking that if I go get a reverse mortgage, the bank will just take my house. Well, that’s not how it works. To better understand this, let’s compare a reverse mortgage to a traditional mortgage.

A Traditional Mortgage

Let’s talk about a traditional mortgage. If you go to buy a house and it’s $500,000, you can put down $100,000 of your own money and borrow the other $400,000 from the bank.

The bank gives the seller the $400,000 and you give the seller your $100,000. Now, you owe the bank $400,000. Well, what do you do to pay the bank back? You make monthly payments to the bank. If you don’t make the payments, the bank can come in and force you to sell your house so they can get all their money back.

Pretty simple, right? You make the payments and if you do, there are no problems. If you stop making the payments the bank can force the sale of the house to get their money back.

A Reverse Mortgage

A reverse mortgage is the exact opposite of that. You can take your house, let’s say for instance it’s paid off and you can go to the bank and say you want to borrow $400,000 against your home. The bank can look at the valuation of the home and say, “OK we’ll loan you the $400,00.” But you don’t have to make the payments. It’s a reverse mortgage. Instead, the payments just accrue to the loan.

Again, you start owing $400,000. If your first month’s payment was $2,000 and you don’t make it because it’s a reverse mortgage. Now you owe $402,000. In the second month, you don’t make a payment. Now you owe $404,000, but you get to keep the $400,000 and use it for retirement.

There’s no risk to you as long as you stay in the house. The bank can’t kick you out of your house. The bank simply gets the first amount of money when your kids sell the house if you die and leave it to them to pay the bank back.

How A Reverse Mortgage Works

A reverse mortgage doesn’t have to be a scary thing. It can be a great tool for retirees to get additional income in retirement or pay off other debt. It’s certainly not for everybody, but this whole idea that the bank is going to kick you out of your house is not valid. As long as you’re living in the house, the bank can’t kick you out.

If they underwrote the reverse mortgage, they’re at risk. If that house is no longer worth what is owed to the bank, that’s the bank’s problem. That’s how the product works. It can be a good tool but be cautious. Do your research before you go ahead and get a reverse mortgage.

Thanks for joining me and I hope you found this information helpful!

P.P.S. Feel free to submit questions here for a chance to have them answered!

  • Sandy and Thomas C.
    Sandy & Thomas C. are clients of Johnson Brunetti and received no compensation for their statement.

    “We always felt our financial needs were in very capable hands. Alex Angst is great to work with. Our advisor always made us feel he had our best interests at heart and explained things so we could understand them.”

  • Lisa D.
    Lisa D. is a client of Johnson Brunetti and received no compensation for her statement.

    “Working with Johnson Brunetti has had a positive impact on my life by providing me with the knowledge, confidence, and peace of mind to move forward with my retirement plans. The process of getting to this point, through their guidance, has been informative and pleasurable.”

  • Ken D.
    Ken D. is a client of Johnson Brunetti and received no compensation for his statement.

    “I view your company as one that puts my interests first. I think that is very uncommon and very refreshing. “

  • Jeanne P.
    Jeanne P. is a client of Johnson Brunetti and received no compensation for her statement.

    “Matt does an awesome job! So easy to understand and he listens to our concerns and addresses them! happy I chose your firm!”

  • Anonymous
    This testimonial was provided by a client of Johnson Brunetti and received no compensation for their statement.

    “I have been pleased with the help and service I have received from the company. I have met several team members on Eric’s team and have found all of them very well prepared to meet with me when reviewing my portfolio. I always feel that I am an important customer and appreciate that very much. I hope the firm continues to focus on the customer and maintains its great service. I think you do a great job for someone like me!!!! I’m happy I chose your firm!”

Johnson Brunetti
Welcome to Our New Website!
Everything was designed with you in mind, making our retirement planning resources more easily accessible to you.
Check out your new resource center, where everything can be organized by article type or topic
Are you ready to speak with a financial advisor?
Johnson Brunetti

Investment Advisory Services offered through JB Capital, LLC.
Insurance Products offered through JN Financial, LLC.
Atlanta • Boston • Hartford | Tel: 800-208-7233

JB Capital LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. Information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.

JB Capital's Form ADV | Disclaimer | Privacy Notice | Client Relationship Summary

*Information about our Affiliation with the UConn Huskies

Johnson Brunetti is a sponsor of WFSB Better Money, WCVB Better Money Boston, WSB-TV Better Money Atlanta, WTNH Money Wisdom, and WTIC Money Wisdom.