A reverse mortgage is a loan that lets homeowners 62 and older convert part of their home equity into cash — without making monthly mortgage payments. Instead of you paying the lender, the lender pays you. The loan is repaid when you sell the home, move out, or die.
For the right homeowner in the right situation, a reverse mortgage can provide meaningful financial flexibility. But the rules are complex, the costs are high, and the risks are real. Understanding exactly how it works before pursuing one is essential.
How a Reverse Mortgage Works
The most common type is the Home Equity Conversion Mortgage (HECM) — a federally insured reverse mortgage backed by the FHA. With a HECM:
- You borrow against your home’s equity. The amount depends on your age, the home’s value, and current interest rates.
- You can receive funds as a lump sum, a line of credit, monthly payments, or a combination.
- You don’t make monthly mortgage payments. Interest and fees accrue and are added to the loan balance.
- The loan becomes due when the last borrower sells the home, moves out for 12+ consecutive months, or dies.
- The home is sold to repay the loan. If the sale price exceeds the loan balance, the surplus goes to you or your heirs.
- If the home sells for less than the loan balance, FHA insurance covers the difference. You and your heirs owe nothing beyond the home’s value.
Who Qualifies
- Must be 62 or older (all borrowers on the title must meet the age requirement)
- Must own the home outright or have significant equity
- Must occupy the home as your primary residence
- Must complete a HUD-approved counseling session before applying
- Must demonstrate ability to pay property taxes, homeowners insurance, and maintenance costs
The amount you can borrow — called the principal limit — increases with age and decreases as interest rates rise. Older borrowers with more equity and lower rates can borrow more.
How You Can Receive the Money
- Lump sum: All proceeds at once. Only available with a fixed interest rate.
- Monthly payments: Fixed monthly disbursements for a set term or for as long as you live in the home.
- Line of credit: Draw funds as needed. Unused portions grow over time — the line of credit actually increases year over year, unlike a HELOC.
- Combination: Some monthly payments plus a remaining line of credit.
The line of credit is often the most flexible and financially efficient option for most borrowers — particularly because the unused portion grows.
Costs and Fees
Reverse mortgages are expensive compared to conventional mortgages. Typical costs:
- Origination fee: Up to $6,000 for HECMs
- Closing costs: Title insurance, appraisal, recording fees — similar to a standard mortgage
- FHA mortgage insurance premium (MIP): 2% upfront plus 0.5% annual on the loan balance
- Servicing fees: Some lenders charge monthly fees
- Accruing interest: Since you make no payments, interest compounds on the growing balance over time
These costs mean the loan balance grows every year. A $200,000 reverse mortgage can grow to $300,000 or more over 10 years, depending on the interest rate. This eats into the equity available to you or your heirs.
What You Must Still Pay
A reverse mortgage does not eliminate all housing costs. You remain responsible for:
- Property taxes
- Homeowners insurance
- HOA fees (if applicable)
- Home maintenance and repairs
Failing to pay property taxes or insurance can trigger a default — and potential foreclosure — even on a reverse mortgage. This has happened to many borrowers who didn’t understand this obligation.
What Happens to Your Heirs
When the last borrower dies, moves, or sells:
- Heirs have typically 6–12 months to repay the loan or sell the home
- They can also purchase the home for 95% of appraised value if they want to keep it
- If the loan balance exceeds the home’s value, FHA insurance covers the gap — heirs owe nothing extra
- If the home sells for more than the loan balance, heirs keep the difference
Heirs should be informed before a reverse mortgage is taken out. Discovering a large loan balance after a parent dies can cause significant conflict and financial hardship if they weren’t expecting it.
When a Reverse Mortgage Makes Sense
- You plan to stay in the home long-term — the high upfront costs are less justified for a short stay
- You have significant equity and need to supplement income or cover healthcare costs
- You want to delay claiming Social Security to maximize your benefit
- A line of credit serves as a contingency fund for large future expenses
- You have no heirs, or heirs understand and have agreed to the arrangement
When to Be Cautious or Avoid It
- You may need to move within a few years (assisted living, health changes, downsizing)
- You have heirs who depend on inheriting the home
- You’re under 65 — the lower initial borrowing limit and longer accrual period make costs higher relative to benefit
- You have a spouse or partner who is not on the title — they could be required to leave the home when the titled borrower dies or moves, unless added as a non-borrowing spouse (subject to specific rules)
- You’re considering it primarily to fund non-essential expenses
Before You Proceed
HUD requires all HECM applicants to complete counseling with an independent, HUD-approved housing counselor. This is not optional — it’s a legal requirement. The counselor will explain your options, the costs, and alternatives such as:
- Downsizing and moving to a less expensive home
- A conventional home equity loan or HELOC
- State and local programs that provide property tax relief or home repair assistance
- Renting out part of your home for income
Take the counseling seriously. It exists specifically to protect homeowners from making a costly decision without full information.