What is a reverse mortgage?

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by Jean Folger

Updated June 16, 2024

In a nutshell

A reverse mortgage involves borrowing some of the equity you’ve built in your home without making loan payments. It can be a good way to boost your retirement income if your savings are limited, but it increases your debt and depletes your equity.

You may qualify for a reverse mortgage if you're 62 or older and have substantial home equity.
You'll receive an advance on your home equity as a lump sum, monthly payments or credit line.
The loan becomes due when you move out, sell your house or pass away.

What is a reverse mortgage?

A reverse mortgage lets you convert your home equity into cash to supplement your retirement income. Unlike a traditional mortgage, you don't make monthly payments to a lender. Rather, the lender gives you an advance on your equity as a lump sum, a series of monthly payments, a credit line or a combination of these options. It's not free money, though. You (or your estate) will eventually need to repay the loan with interest.

This is somewhat similar to a home equity loan or a HELOC. The difference between a standard home equity loan and a reverse mortgage is that you don’t have to repay a reverse mortgage until you leave your home or pass away, but with a second mortgage, you begin making payments when you receive your funds.

Types of reverse mortgages

Several kinds of reverse mortgages are available to qualified borrowers:

Home equity conversion mortgages (HECMs): This is the most common type of reverse mortgage and is insured by the Federal Housing Administration (FHA). These loans are available through FHA-approved lenders for homes valued up to $1,149,825 in 2024. You can use the cash to pay for basic living expenses, home repairs or anything else.
Proprietary reverse mortgages: If your home's value exceeds FHA HECM limits, you'll need a proprietary (also called a "jumbo") reverse mortgage. Private lenders offer and insure these loans, which have higher rates and fewer federal consumer protections than HECMs.
Single-purpose reverse mortgages: These loans are offered by state, local and nonprofit agencies and are generally the least expensive reverse mortgage option. However, there's a catch: Single-purpose reverse mortgage funds can only be used for specific, lender-approved expenses, such as property taxes or home repairs.

How reverse mortgages work

A reverse mortgage is a special loan for homeowners aged 62 or older with substantial home equity. (You can estimate your home equity by subtracting your mortgage balance from your home's current value.)

The amount you can borrow depends on your age (and the age of any co-borrowers), your home's appraised value and the interest rate you qualify for. You can typically borrow more money if you're older, have a higher-priced home and get a lower interest rate and vice versa.

When you take out a reverse mortgage, you still own the home and the title remains in your name. Throughout the loan, you must use it as your primary residence, maintain it and stay up-to-date on paying property taxes and homeowners insurance.

Interest and fees accrue monthly on reverse loans, so the amount you owe increases — and your home equity decreases — over time. When the home is no longer your primary residence because you move out, transfer ownership, go into assisted living or pass away, the reverse mortgage is considered matured and must be repaid.

This is usually done by selling the home to pay off the loan, then your heirs receive whatever equity is left over as their inheritance, according to your will. However, if your heirs wish to keep the home, they will need to pay off the reverse loan on their own or by refinancing it into a traditional forward mortgage in their own name. Most reverse mortgages have a "nonrecourse" clause so you won’t owe more than your home's value when the loan becomes due and the house is sold.

Pros:

You can supplement your retirement income with a lump sum, regular monthly payments or a credit line.
You can age in place, which can be cheaper than downsizing, especially when home prices and interest rates remain high.
Eligible nonborrowing spouses can continue living in the home even if the last remaining borrowing spouse dies or moves out if certain conditions are met.
The money you receive isn't considered taxable income.
Repayment is required only after you move, sell the home or pass away.
Thanks to the nonrecourse clause, you can't owe more than the home's value when you repay the loan.

Cons:

The fees and other borrowing costs can be higher than alternatives like a home equity loan or HELOC.
You can only deduct the mortgage interest once the loan is repaid in full.
You still pay property taxes, homeowners insurance, HOA fees and maintenance and repair costs, or your lender can call the loan due and require it to be repaid.
Nonborrowers living in the home could face problems if the loan suddenly becomes due and needs to be sold.
The income might affect Social Security or Medicare benefits if you don't spend the payments during the month you receive them.

Eligibility criteria for a reverse mortgage

Not everyone can take out a reverse mortgage. Here's a rundown of the key borrowing requirements:

Age: You must be at least 62 years old.
Residency: The home must be your primary residence and remain so for the life of the loan.
Equity: You must own your home outright or have 50% or more equity.
Financial obligations: You must continue paying property taxes, homeowners insurance, HOA fees (if any) and home maintenance costs.
Property standards: Your home must be kept in good condition.
Federal debts: You can't have any outstanding federal debts like federal student loans or unpaid income taxes.
Counseling: If you apply for a HECM loan, you must attend a free housing counseling session with a HUD-approved counselor.

How to apply for a reverse mortgage

If you decide a reverse mortgage is right for you, the first step is to shop around and compare offers from reverse lenders. Ask about upfront and ongoing loan costs, including origination fees, closing costs and loan servicing fees, which vary among lenders. When you're ready, you'll fill out a loan application, speak with a HUD-approved counselor if you’re applying for a HECM, get an appraisal, wait for the underwriting process and close on the loan.

Remember that most reverse mortgages give you three business days to cancel the deal for any reason. This is called the right of rescission. You'll have to notify the lender in writing to cancel, and the lender has 20 days to return any money you've paid.

How does a reverse mortgage get paid back?

Generally, you, your spouse, a co-borrower or your estate must repay the loan when you sell the home or pass away — typically using proceeds from the sale. However, you may need to repay the loan sooner if the house is no longer your principal residence, the home falls into disrepair or you don't pay your property taxes or homeowners insurance premiums.

Potential risks associated with reverse mortgages

Reverse mortgages have several drawbacks, including high costs and potential foreclosures. The Consumer Financial Protection Bureau (CFPB) warns about two common reverse mortgage scams to watch out for:

Contractor scams: Be skeptical of contractors who approach you about using a reverse mortgage to pay for home repairs or renovations. The CFPB warns that this could be a scam and that you should avoid being pressured into getting a loan.
Scams targeting veterans: The Department of Veterans Affairs (VA) doesn't offer reverse mortgages. However, some mortgage advertisements promise special deals or offer a "no-payment" reverse mortgage option for veterans.

Alternatives to reverse mortgages

A reverse mortgage is one way to tap into your home equity, but you have other options.

Home equity loan: A home equity loan is a second mortgage secured by your home. You receive the funds as an upfront lump sum and repay the principal and interest by making fixed monthly payments over five to 30 years. You can generally borrow up to 80% of your available home equity, though the exact amount depends on your financial situation.
Home equity line of credit (HELOC): A HELOC is a revolving credit line secured by your house. During the five- to 10-year draw period, you can borrow up to your approved limit, repay it and borrow again as needed, much like a credit card. After that, the repayment period begins, and you make monthly principal and interest payments over 10 to 20 years, usually at variable interest rates.
Cash-out refinance: A cash-out refinance lets you use the equity in your home to replace your current mortgage with a new, larger home loan, letting you pocket the difference in cash. You can use cash-out funds however you wish. These loans typically have a term of 15 to 30 years, which could extend your overall loan term and total interest costs over time.

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A reverse mortgage can deliver a much-needed stream of income during retirement. However, the high fees can make reverse mortgages prohibitively expensive for some homeowners. Additionally, your debt increases while your home equity decreases over time, which can reduce the inheritance you leave your heirs. Consider other options — including home equity loans and HELOCs — before deciding whether a reverse mortgage is right for you.

Frequently asked questions (FAQs)

What is the downside to a reverse mortgage?

Reverse mortgages deplete your home equity and have upfront and ongoing costs that can increase your overall debt. Plus, you can only deduct the interest on your taxes once the loan is repaid in full.

Another potential issue is that reverse mortgages must be repaid when you move out, sell the home or pass away, or if you don't pay your property taxes or homeowners insurance. If you or your estate can't repay the loan, your lender could foreclose on your home and you’ll lose it.

Do you lose your home with a reverse mortgage?

The title to your home remains in your name when you take out a reverse mortgage and stays that way throughout the life of the loan. However, you could lose your home if the loan becomes due and you (or your estate) can't pay it off within a specified time frame. The loan becomes due if you no longer live in the home as your primary residence, fail to pay your property taxes or homeowners insurance or if the house falls into disrepair.