A reverse mortgage is a type of loan for homeowners (usually age 62+) that lets them turn home equity into cash without making monthly mortgage payments; the loan becomes due when the homeowner moves out, sells the home, or dies.
With a traditional mortgage the borrower makes monthly payments to the lender. With a reverse mortgage the lender pays the homeowner, and interest accrues on the loan balance instead of the homeowner reducing principal each month.
Homeowners borrow against the equity in their home. Lenders (banks, mortgage companies, or government-backed programs) issue the loan and place a lien on the property, allowing the homeowner to receive funds today while keeping the right to live in the house.
Common payout options include:
No monthly principal payments are required, so interest and fees are added to the loan balance over time. The loan balance typically increases each month; the home’s equity decreases correspondingly unless home value grows faster than the loan balance.
The homeowner retains title and ownership responsibilities (property taxes, insurance, maintenance). The lender holds the reverse mortgage lien until repayment.
Most reverse mortgages require the youngest borrower to be at least 62 and the property to be the borrower’s primary residence.
Typical eligible properties include single-family homes, certain condominiums, some manufactured homes, and 2–4 unit owner-occupied properties. Check specific program rules for exceptions.
If there’s an existing mortgage, it usually must be paid off at closing using reverse mortgage proceeds, or the homeowner must meet other lender conditions.
Lenders assess whether borrowers can meet ongoing obligations (property taxes, homeowner’s insurance, condo fees). Borrowers must live in the home as their principal residence and maintain the property.
HECMs are the most common reverse mortgage, insured by the U.S. Department of Housing and Urban Development (FHA). They come with consumer protections, mortgage insurance, and mandatory counseling before application.
Private lenders offer proprietary reverse mortgages for higher-value homes; they may allow larger payouts but don’t carry FHA insurance and may have different costs or terms.
Offered by some state or local government agencies or nonprofits, these are low-cost options restricted to a single use (e.g., home repairs, property taxes).
The amount you can access depends on: borrower’s age (older borrowers qualify for more), current interest rates (lower rates increase borrowing power), the appraised value of the home (subject to program limits), and any FHA lending limits for HECMs.
Example: A 72-year-old homeowner with a $300,000 appraised home and low interest rates might access 40–60% of value as a line of credit or monthly conversion (exact numbers vary). Lenders use a calculation called the principal limit to produce an exact figure.
Any existing mortgage must be paid off from reverse mortgage proceeds, which reduces the net amount available to the homeowner after closing costs and fees.
Upfront costs can include origination fees, FHA mortgage insurance premiums (for HECMs), appraisal, title and closing fees, and third-party charges (e.g., recording). HECMs have specific insurance premiums required by the FHA.
Interest accrues on the outstanding balance (fixed or variable rate depending on loan). Some loans charge monthly servicing fees and require the borrower to maintain taxes and insurance.
Typical HECM upfront costs may range from several thousand to 5–6% of the home value (depending on appraisal/closing costs and mortgage insurance). Ongoing interest rates vary; variable rates are tied to indexes and can rise or fall.
Because interest and fees accumulate, they reduce remaining equity over time. Heirs inherit any remaining equity after the loan is repaid; higher fees and longer loan duration mean less equity left at payoff.
The loan becomes due when the last surviving borrower permanently moves out, sells the home, or dies. Failure to pay property taxes, homeowner’s insurance, or to maintain occupancy can also trigger default and potential foreclosure.
Repayment generally comes from the home sale proceeds. The homeowner, their estate, or heirs can repay or refinance to keep the home. If the loan balance is less than home value, remaining proceeds go to the estate.
Most reverse mortgages (including HECMs) are non-recourse: heirs or the estate cannot owe more than the home’s market value at repayment. The lender’s recovery is limited to the property’s sale proceeds.
Heirs should quickly assess market value vs. loan balance. If the home’s value exceeds the loan, selling may provide funds; if not, heirs may choose not to assume the property.
Heirs should notify the lender, order an appraisal if needed, and consult an estate attorney. Lenders typically provide information on payoff deadlines and procedures.
Reverse mortgage proceeds generally do not affect Social Security or Medicare benefits; they are not taxable income.
Lump-sum proceeds could affect Medicaid or other need-based benefits if they increase countable assets above eligibility limits. Allocation timing and how funds are used matter; consult a benefits counselor before proceeding.
Payments from a reverse mortgage are typically not taxable income. Interest is not deductible until paid (generally when the loan is repaid), and tax rules can change—check with a tax advisor.
Main risks include high upfront costs, accelerating loan balance that reduces legacy, variable interest that can increase costs, and the potential for foreclosure if property obligations are not met.
You can face foreclosure for failing to pay property taxes, maintain homeowner’s insurance, or for no longer occupying the property as your principal residence. Maintaining these obligations is critical.
Avoid unsolicited offers, pressure to sign quickly, deals that recommend putting proceeds into risky investments, or companies that promise unrealistic guarantees. Always get independent counseling.
HECMs include federal protections and require counseling by a HUD-approved counselor to ensure you understand alternatives, costs, and responsibilities. Counseling is mandatory before endorsement for HECM loans.
Selling and moving to a smaller, less expensive home often frees more cash with fewer fees and less complexity. Renting out a room or unit can provide ongoing income.
Refinance or cash-out refinance may offer lower costs if you can qualify. A HELOC offers a line of credit with different terms—compare costs and eligibility: HELOC and refinance.
Consider annuities, personal loans, or adjustments to retirement withdrawal strategies. Talk to a financial planner to evaluate how each option affects taxes, benefits, and estate plans—see retirement-planning.
Comparing options in a simple table helps; weigh costs, flexibility, impact on heirs, and risk before deciding.
Counseling with a HUD-approved counselor or program counselor is required for HECMs and strongly recommended for other types. Counseling covers alternatives, costs, and long-term effects. Find a counselor via local HUD resources or lender-counseling listings.
Get multiple written quotes. Compare upfront fees, interest rates (fixed vs variable), mortgage insurance, servicing fees, and payout options. Ask for an itemized fee sheet and a loan projection.
Typical documents: proof of age, proof of ownership, mortgage statements, income/asset information, property taxes, and insurance. From application to closing often takes 30–60 days but can vary.
Marjorie, 74, owns a $280,000 home with no mortgage. She needs funds for medical expenses and wants to stay in her home. After counseling she chooses a HECM with a line of credit plus small monthly payments to cover predictable costs. Her funds cover medical bills and a modest home safety update. She continues to pay property taxes and insurance. When she dies five years later, her son decides to sell the home. After repayment of the reverse mortgage (including accrued interest and fees) the remaining proceeds go to the estate.
What went right: counseling helped Marjorie choose a product matching her needs; keeping obligations current avoided default. What to watch: interest grew the balance, reducing equity available later; family communication and estate planning smoothed the payoff process.
Typically homeowners aged 62+ who live in the home as their primary residence, own acceptable property types, and meet a financial assessment for property obligations.
Yes — you retain title and ownership, but the lender places a lien on the property until the loan is repaid.
The loan is repaid when the homeowner permanently leaves the home, sells it, or dies. Failure to maintain property tax/insurance obligations can also trigger repayment.
Proceeds may affect Medicaid or other need-based benefits depending on how funds are received and retained. Talk to a benefits counselor before taking lump sums.
You can face foreclosure for not meeting obligations (taxes, insurance, maintenance, occupancy). Taking a reverse mortgage does not give the lender the right to evict as long as obligations are met.
Yes for HECMs and strongly recommended for other products. Counseling ensures you understand costs, alternatives, and long-term consequences; search for approved counselors via lender-counseling.
Reverse mortgages can benefit older homeowners who want tax-free cash without monthly mortgage payments and plan to remain in their home. They are not ideal for homeowners who want to preserve maximum legacy, who can qualify for cheaper credit, or who may need Medicaid sooner.
Helpful organizations: HUD, AARP, CFPB — and state or local housing counseling agencies. For program-specific counselor listings and lender resources, search HUD-approved counseling and local programs.
