Reverse mortgages: What they are and how they work
Key takeaways
- A reverse mortgage allows homeowners who are 55 and older to tap their home’s equity for tax-free payments.
- The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is available to borrowers 62 and older.
- Reverse mortgages can be complicated; ask a financial advisor or estate attorney for advice before signing yours.
If you’re an older homeowner, you might be considering a reverse mortgage. These types of loans provide payments — tax-free — based on your home’s equity, with very specific rules attached. Here’s more on how reverse mortgages work and how to decide if one might be right for you.
What is a reverse mortgage?
A reverse mortgage is a type of loan that pays off the current mortgage of homeowners ages 55 and older and then allows them to receive tax-free payments from their reverse mortgage lender by borrowing against their home’s equity.
Typically, homeowners use reverse mortgages to:
- Supplement retirement income
- Pay off higher-interest debt
- Pay for home repairs or improvements (e.g., adding accessibility features)
- Cover medical expenses
Some homeowners also use reverse mortgages to delay taking social security until age 70, when the benefits max out.
“In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans,” says Bruce McClary, senior vice president of media relations and membership at the National Foundation for Credit Counseling.
In addition, some reverse mortgage options allow the borrower to buy a new primary residence. This gives you the option to downsize or relocate from your current home.
HECM vs. non-HECM reverse mortgages
How does a reverse mortgage work?
To be a candidate for a reverse mortgage, you’ll need a considerable amount of equity in your home. You won’t be able to borrow the entire value of your home, however, even if you’ve paid off your primary mortgage.
For a HECM, the amount a homeowner can borrow, known as the principal limit, varies based on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit ($1,149,825 in 2024 and $1,209,750 in 2025) and the home’s value.
You’re more likely to be eligible for a higher principal limit the older you are, the more the property is worth and the lower the interest rate.
You might also be able to borrow more if you get a variable-rate HECM. With a variable interest rate, your payment options include:
- Equal monthly payments, provided the property remains at least one borrower’s primary residence
- Equal monthly payments for a fixed period
- A line of credit that can be accessed until it runs out
- A combination of a line of credit and fixed monthly payments for as long as you live in the home
- A combination of a line of credit, plus fixed monthly payments for a set length of time
If you choose a HECM with a fixed interest rate instead, you’ll receive a one-time, lump-sum payment.
With either option, the interest on the reverse mortgage accrues every month. You can roll these charges into the loan balance. Note that the interest rates on reverse mortgages vary by lender, but tend to be higher compared to a regular mortgage.
While you’re not required to repay the reverse mortgage while you live in the home, you’ll still need to pay for homeowners insurance, property taxes, any homeowners association dues and the home’s upkeep.
Once you move out of the home, you are required to repay the loan balance. If you sell the house, you can use the proceeds to repay what you owe.
If you pass away, your heirs can sell the house to cover the loan (and keep any profit above that) or turn the house over to the lender to satisfy the loan. If they want to keep the house, they can settle up with the lender by paying either the full loan balance or 95 percent of the appraised value of the house, whichever is less.
How much does a reverse mortgage cost?
With a HECM reverse mortgage, just like with a standard purchase mortgage, you’re required to pay closing costs, including:
- Mortgage insurance premiums (MIPs) – There is a 2 percent initial MIP due at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
- Origination fee – To process your HECM loan, lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
- Servicing fees – Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. This monthly servicing fee can’t exceed $30 for loans with a fixed rate or an annually-adjusting rate, or $35 if the rate adjusts monthly.
- Third-party fees – Third parties can charge their own fees as well, such as for the appraisal and home inspection, a credit check, title search and title insurance or a recording fee.
Types of reverse mortgages
Most reverse mortgage borrowers obtain a HECM, but there are other types of reverse mortgages, as well. Here’s a breakdown:
- Home Equity Conversion Mortgage – The most popular type of reverse mortgage, HECMs are insured by the FHA. You can choose how to receive the payments, such as fixed monthly payments or a line of credit (or both options at once). Although widely available, HECMs are only offered by FHA-approved lenders, and before closing, all borrowers must consult with a U.S. Department of Housing and Urban Development-approved reverse mortgage counselor.
- Proprietary reverse mortgage – This is a loan offered by a private reverse mortgage lender and not insured by the government. Some proprietary reverse mortgage options allow you to take out a loan at age 55, rather than age 62. Typically, you can receive a larger loan advance, too, especially if you have a higher-valued home.
- Single-purpose reverse mortgage – Not as common as a HECM or proprietary reverse mortgage, this is a loan from a state or local government agency or nonprofit. Generally, it’s the least expensive of the three options, but you can only use the loan to cover one purpose, such as a handicap accessible remodel, says Jackie Boies, a senior director of housing services for Money Management International, a nonprofit debt counselor based in Stafford, Texas.
Reverse mortgage requirements
To be eligible for a HECM reverse mortgage, the primary borrower must be age 62 or older. The other requirements for a HECM include:
- You must either own your home outright or have paid down most of your mortgage
- You must live in your home as your primary residence
- You must participate in an information session provided by a U.S. Department of Housing and Urban Development-approved reverse mortgage counselor
- You can’t be delinquent on any federal debt
- You must continue to pay homeowners insurance, property taxes and any homeowners association dues
Advantages and disadvantages of a reverse mortgage
Reverse mortgage loans can be a useful tool, but they aren’t without drawbacks.
Pros:
- Provide tax-free supplemental income
- Allow homeowners to age in place
- Don’t require repayment during the borrower’s lifetime — unless they move
Cons:
- Balance grows with time and is often settled by the homeowner’s heirs
- Payments can affect eligibility for Medicaid programs and Supplemental Security Income (SSI) benefits
- Heirs must pay a large sum to keep the house
- Can be complicated, especially if a borrower remarries after taking out the loan
Is a reverse mortgage right for you?
For many homeowners, a reverse mortgage makes it possible to stay in their homes as they age while receiving tax-free income. Many use the funds to supplement Social Security, cover medical expenses, pay for in-home care or make home improvements or modifications.
“A reverse mortgage can make sense for some seniors, mainly those who answer yes to these questions: Do you need additional income to pay your bills? Do you plan to stay in the home? And are you OK with passing on the property to your heirs with a debt they’ll need to pay off?” says Jeff Ostrowski, principal writer for Bankrate.
Keep in mind, too: While not all reverse mortgage lenders use high-pressure sales tactics, some do use them to attract borrowers. Proceed with caution in these circumstances.
“While a reverse mortgage creates some breathing room in your budget, borrowers beware,” says Ostrowski. “Lenders market these products aggressively, and the fees can be steep.”
'We had three clear goals in getting our reverse mortgage'
Alternatives to a reverse mortgage
If you’re not sold on taking out a reverse mortgage, consider these other options:
- Home equity loan or home equity line of credit (HELOC) – Both options allow you to borrow against the equity in your home — up to 85 percent, in most cases. With a home equity loan, however, you’ll have to make monthly payments. With a HELOC, you’ll make payments after the draw period ends. The interest rates and fees for both options tend to be lower than those of a reverse mortgage.
- Refinancing – If you’ve yet to pay off your mortgage, refinancing to a new, shorter loan could help lower your monthly payments, especially if you can get a lower interest rate on top of the shorter term. Alternatively, spreading out what you currently owe over a longer term (e.g., 30 years) will mean you’ll pay more total in interest, but it can still lower your monthly payments significantly. If you need substantially more funds, you might want to look into a cash-out refinance instead.
- Shared equity agreement – With this arrangement, you’ll partner with a company to get money in exchange for a percentage of your home’s value, and often a piece of future appreciation as well. Like reverse mortgages, you aren’t obligated to make monthly payments with this option, but the money (technically an investment, not a loan) must be repaid once the term ends.
Frequently asked questions
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