How does a reverse mortgage work?

A reverse mortgage is a program to help you tap into your home equity. You will not need to make payments or pay back the loan until you sell the house. Typically, you can take about 60 percent of your equity in a reverse mortgage. There must be enough left over to cover closing costs, which are due in advance and can run as much as 5 percent of your home's value. Use this calculator to help illustrate how a reverse mortgage might work in your situation.

Home Information

Current market value of home

Annual appreciation rate ?

How much you expect your home's value to grow each year.

Number of months you plan to occupy ?

How long you expect to live in the home before the loan is repaid.

Mortgage Information

Reverse mortgage loan amount (typically no more than 60% of your home equity) ?

Typically no more than 60% of your home equity.

Annual fixed interest rate (assumes monthly compounding) ?

Assumes monthly compounding.

Enter your values and select Calculate.

The projected remaining equity figure shows what would be left over in your home after the reverse mortgage balance, including all the interest that has accrued over your planned occupancy, is subtracted from the home's projected future value. It does not include closing costs, mortgage insurance premiums, servicing fees, or property taxes and insurance you're required to keep current, all of which would reduce this number further in practice.

Two inputs move this result the most: the number of months you plan to occupy the home, and the interest rate. Because reverse mortgage interest compounds monthly and is added to the balance rather than paid down, the loan balance grows faster the longer you stay and the higher the rate, which is why small changes to either input can shift the equity outcome by a large amount over a long horizon.

The home appreciation rate works in the opposite direction, and it's worth remembering that real markets don't appreciate at a steady annual rate the way this model assumes. A period of flat or declining home values would leave you with less equity than shown here, even if nothing else changed.

It's worth revisiting this calculation whenever your plans shift, if you get a firmer estimate of your home's value, or before finalizing any reverse mortgage terms with a lender. Because these loans carry long-term consequences for your estate and heirs, bringing this projection to a HUD-approved reverse mortgage counselor or financial advisor before you commit is a reasonable next step. Having run the numbers at all puts you ahead of most people considering this decision.

This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.