A reverse mortgage is a loan secured by the equity in your home. With a reverse mortgage, you borrow against the equity you have built up in your home using a mortgage loan. In return, the mortgage lender either gives you a lump sum of cash or pays you a predetermined monthly amount for a fixed number of years or until the house is sold. At the end of that time, you'll owe the mortgage lender the principal and interest due on the house. To repay the loan, you or your estate may have to sell the house or turn it over to the mortgage lender. It's known as a reverse mortgage because unlike a traditional mortgage, the principal balance of the loan gets larger over time, rather than smaller.

Reverse mortgages were developed to assist elderly citizens who own their own homes but need an additional source of income. They work best in situations where homeowners wish to stay in their homes until they die. If you are approaching retirement and are unable to sell your home, a reverse mortgage may be an option for you. However, it can limit your ability to move in the future, because you will need to repay the reverse mortgage from the sale proceeds. In addition, if you are unable to afford or qualify for a refinanced mortgage when the term of the reverse mortgage is up, you may be forced to sell your home. A reverse mortgage also lowers the value of your estate, because it reduces the equity you have built up in your home. This is a disadvantage if you were planning to leave your house as an inheritance for your family.