02 Jan How do reverse mortgages work? Should I get one?

Q. Can you give me some insight information on reverse mortgages? I have no one to step up to continue paying the mortgage if I pass away. What are the qualifications to apply?
— Homeowner

A. There is a lot to consider with a reverse mortgage.

You shouldn’t go into one lightly.

Let’s go over how it works.

With a traditional mortgage, a bank lends you money to buy your home, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

You repay the loan by making monthly payments for 10, 20 or 30 years, he said.

“At first, your monthly payments cover mostly interest. As the loan is repaid and your balance is less, your payments start to cover mostly principal,” he said.

In a reverse mortgage, the bank lends you money against the equity in your home.

Because the funds are the proceeds from a loan, it is not income subject to state or federal income tax, Kiely said.

“As with a traditional mortgage, the loan is subject to interest,” Kiely said. “The big difference between a traditional mortgage and a reverse mortgage is there are no monthly repayments. Since there is interest accruing and no monthly payments, your mortgage balance grows a little every month.”

So how does a reverse mortgage work?

The lender calculates how much they are willing to give you in your mortgage. The calculation is based on the value of your home and the borrower’s age, Kiely said.

“If you agree to the mortgage, the lender first pays off any balance on any existing mortgage you have. They do this so they are the first mortgage holder,” he said. “Any leftover money goes to the homeowner to spend any way they want.”

The homeowner does not have to make any monthly payments on the mortgage. As time goes on interest accrues on the mortgage. The accrued interest makes the reverse mortgage balance grow, Kiely said.

“The reverse mortgage must be repaid if the homeowner sells the house or dies,” he said. “In your question, you said you have no one to step up and continue paying the mortgage if you die. Since reverse mortgages must be repaid by the estate if the homeowner passes away, it may not do what you want it to do.”

We recommend you meet with a financial advisor who can review your entire situation before you enter into any reverse mortgage.

Email your questions to .

This story was originally published in January 2025.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.