What is a reverse annuity?

A reverse annuity, more commonly referred to as a reverse mortgage, is a financial arrangement that enables homeowners, particularly elderly individuals, to access their home equity. This is achieved through a scenario where banks or financial institutions provide monthly payments to the homeowners in exchange for a portion of the value of their home.

In this setup, rather than making payments to a lender, the homeowner receives a stream of income from the equity they have built up in their property, allowing them to use these funds for various purposes, such as covering living expenses, medical costs, or supplementing retirement income. The loan is typically repaid when the homeowner sells the home, moves out, or passes away, at which point the bank receives the agreed-upon value.

Understanding why this answer is valid helps frame the concept of reverse annuities distinctly from other financial instruments or accounts. For instance, options like a lump sum payment or a loan against future income do not capture the uniqueness of how reverse mortgages operate in relation to homeowners receiving ongoing payments based on home equity.