Let’s examine exactly what the term “reverse mortgage” means… and how it works differently from a traditional mortgage. When you make a payment on your traditional mortgage, the balance goes down a painfully small amount each month. But, with a reverse mortgage, you don’t need to make a principal and interest payment, so each month the balance goes up a painfully small amount; this is called reverse amortization. Let’s see how reverse amortization works in a reverse mortgage. A senior homeowner borrows 50% or less of the value of their home with a reverse mortgage. That means, that the homeowner is getting home appreciation on a value twice the amount of the interest incurred on the reverse mortgage. At 4% appreciation, the average appreciation rate nationally since 1960, it also means that the home’s value is typically growing faster than the loan balance. The net result is that the home’s equity can increase, even though principal and interest payments are not being made. So, a portion of the home’s appreciation can cover the carrying cost of the mortgage, turning appreciation into cash flow.