A reverse mortgage is a loan borrowed against the equity in your home. You must be at least 62 years old to qualify for a reverse mortgage, so it is often used by people of retirement age to supplement Social Security or other retirement income.

Instead of making a payment each month as you would with a traditional mortgage loan, a borrower receives money with a reverse mortgage. The loan is secured through the equity in the house, and accrues interest monthly. Money may be received from the lender through a lump sum, monthly payments, or a combination of both. Since the borrower does not make payments back towards the balance, the loan grows each month as interest is tacked on.

The loan will come due when the home is no longer the primary residence of the borrower(s). This will happen as a result of either the property being sold, the resident(s) moving out, or death.

Once the home is not the primary residence of the borrower, the balance can either be paid by the borrowers or their estate, or the home can be sold to pay back the loan. If the property is sold, the difference between the loan and the sale price (in other words, any remaining equity) will belong to the estate. If it is sold for less than the full loan amount, the lender must absorb the loss. They can then request reimbursement from the Federal Housing Administration to cover their loss.

While a reverse mortgage can be used to supplement retirement income and ensure a comfortable lifestyle, there are pitfalls that need to be carefully considered. We recommend that anybody considering a reverse mortgage discuss it with a trusted financial advisor before making any agreements.