In more detail
Instead of you paying the lender, the lender pays you, as a lump sum, a monthly income or a line of credit. Interest, insurance premiums and fees are added to the balance each month, so the debt grows and the equity shrinks over time. The amount available depends on the youngest borrower's age, the home's value and interest rates. In the US, most are federally insured HECMs for borrowers aged 62 or older; they are non-recourse, so the debt repaid at sale cannot exceed the home's value. You must keep paying property tax, insurance and upkeep, or the loan can become due.
Why it matters
It can turn a paid-off home into income without moving, but compounding interest can consume most of the equity, leaving less for heirs or a later move into care. Read the terms carefully and get independent advice.
Example
$100,000 drawn as a lump sum, with interest and insurance totalling 7.5% a year compounded monthly, grows to $211,206.46 after 10 years and $306,945.17 after 15 years, with no payments made.
Common confusion
A HELOC also borrows against home equity, but requires monthly payments from the start.