A reverse mortgage is so named because the direction of its cash flow is in the reverse order of a regular mortgage. For a regular mortgage, the lender makes the loan to a borrower at an interest rate and a maturity term and expects the borrower to repay the loan through monthly mortgage payments. By contrast, for a reverse mortgage, the lender makes a loan to an elderly home owner at an interest rate but does not expect the loan to be repaid until the borrower has either died, moved out of the house permanently (mostly for health reasons to a nursing home), or sold the house. During the period when the mortgage is outstanding, the borrower has no monthly-payment obligation. In fact, depending on the design of the reverse mortgage, during the mortgage's outstanding period the lender may actually make a monthly payment to the borrower.

The design of reverse mortgages recognizes two fundamental facts. First, borrowers of reverse mortgages are elderly home owners who are free and clear of regular mortgages. Their home equity is essentially the market value of their houses. Second, having lived in their houses for a long period of time, elderly home owners are physically and sentimentally reluctant to sell and move out of their houses. Consequently, cashing in the equity by selling their houses is not as readily an option to them as to younger home owners. Through reverse mortgages, elderly home owners can tap into their home equity without having to sell and move out of their houses.

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