A reverse mortgage is a loan that allows homeowners 62 or older to convert a portion of their home equity into cash — without having to sell the home or make monthly mortgage payments. Instead of you paying the lender each month, the lender pays you. The loan is repaid when you sell the home, move out permanently, or pass away.
For some homeowners on fixed incomes, a reverse mortgage can provide meaningful financial flexibility. For others, the costs and trade-offs make it the wrong choice. Understanding how it works is the first step.
How a Reverse Mortgage Works
The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the federal government through the FHA. You can receive the money as a lump sum, a line of credit, monthly payments, or a combination. Interest accrues on the outstanding balance over time, but no monthly payment is required.
The loan does not need to be repaid as long as you continue to live in the home as your primary residence, keep up with property taxes and homeowners insurance, and maintain the property. When the home is eventually sold, the loan balance plus interest and fees is repaid from the proceeds. If the sale price exceeds the loan balance, the difference goes to you or your heirs.
Who Qualifies
To qualify for a federally insured HECM, you must:
- Be 62 years old or older
- Own the home outright or have substantial equity
- Use the home as your primary residence
- Be current on any federal debt (such as federal taxes or student loans)
- Complete a HUD-approved counseling session before applying
The counseling session is required by law and covers alternatives to a reverse mortgage, the costs involved, and your obligations as a borrower. It typically costs around $125 and can be done by phone.
What It Costs
Reverse mortgages have significant upfront costs. For a federally insured HECM, these typically include:
- Mortgage insurance premium (MIP): 2% of the home’s appraised value upfront, plus 0.5% annually on the loan balance
- Origination fee: up to $6,000 depending on the home’s value
- Closing costs: appraisal, title insurance, and other standard closing costs
- Servicing fees: possible monthly fees over the life of the loan
These costs can add up to tens of thousands of dollars, which is why a reverse mortgage generally makes more sense for homeowners who plan to stay in the home for many years.
Potential Downsides
A reverse mortgage reduces the equity in your home over time as interest accrues. This means there may be less — or nothing — left for heirs when the home is sold. Heirs who want to keep the home will need to repay the loan balance, typically by refinancing or paying it off directly.
You also remain responsible for property taxes, homeowners insurance, and home maintenance. Failing to keep up with these obligations can trigger loan default and foreclosure, even with a reverse mortgage.
When It Makes Sense — and When It Does Not
A reverse mortgage may be worth considering if you plan to stay in your home long-term, need to supplement retirement income, and have significant equity with few or no heirs depending on the estate. It can be a useful tool for covering healthcare costs, paying off an existing mortgage, or creating a financial cushion.
It is generally not a good fit if you plan to move within a few years (the costs may not be worth it), if you have a spouse or partner who is under 62 and may need to remain in the home, or if leaving the home to heirs is a priority.
Before moving forward, speak with a HUD-approved housing counselor and a financial advisor who does not have a financial stake in the outcome. The required counseling session is a good starting point for getting unbiased information.
Money Instructor does not provide tax, legal, or investment advice. This material has been prepared for educational and informational purposes only. You should consult your own advisors regarding your own financial situation.
