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If you’re like many retirees, your home equity represents one of your largest stores of wealth. While many homeowners turn to home equity loans and lines of credit (HELOCs) to unlock their home’s value, these loans come with a catch: the burden of monthly repayments, which can strain fixed retirement incomes.
This pressure is especially concerning given that some 20% of retirees say they have no retirement savings, according to a recent survey. For these folks and others with limited savings, tapping into home equity without monthly payments could be a financial lifeline.
Enter reverse mortgages, a financial product designed for homeowners ages 62 and older. Reverse mortgage flip the traditional lending model on its head: Instead of you repaying the lender, the lender pays you with tax-free payments. The loan only becomes due after a “triggering event” — most typically when you die, move out or sell your home.
While reverse mortgages may work well for some, they’re considered an expensive way to borrow and come with risks that include the potential loss of your home. In this article, we explore how reverse mortgages work, who might benefit from this financial tool — and who should steer clear altogether.
Reverse mortgages: What they are and how they work
A reverse mortgage is a type of loan that allows homeowners ages 62 and older to borrow against their home equity, using their home as collateral.
The loan amount you’re approved for is based on:
Your home’s appraised value
The age of the youngest borrower
The reverse mortgage program you choose
Current interest rates
The Home Equity Conversion Mortgage (HECM) limit — which is $1,149,825 in 2024
The Federal Housing Administration’s principal limit
The principal limit — also called a principal limit factor or PLF — is usually 40% to 60% of your home’s value and determines your borrowing capacity. For example, with a $300,000 home and 50% PLF, you could potentially borrow up to $150,000, less any existing mortgage balance.
Depending on whether you choose a fixed- or variable-rate reverse mortgage, you can receive funds as a lump sum, fixed monthly payments or a line of credit — or a combination of these options. Every month, interest and mortgage insurance fees accrue against the borrowed amount and are added to the loan balance, which grows bigger over time.
The loan becomes due and must be paid off when you sell your home, you move out for longer than 12 months or you die. While you’re not required to make monthly repayments with a reverse mortgage, you must continue to pay property taxes and homeowners insurance and keep the property in good condition. Failure to meet these obligations can result in foreclosure and the loss of your home..
Types of reverse mortgages
There are three main types of reverse mortgages with different features, options and terms:
Home Equity Conversion Mortgages. The most popular type of reverse mortgages, HECMs are insured by the Federal Housing Administration (FHA). They offer the most flexibility in how you receive your funds, including a lump sum, line of credit or fixed monthly payments. And they’re available as both fixed-rate and variable-rate loans.
Proprietary reverse mortgages. Also called jumbo reverse mortgages, these are private loans backed by private lenders — not the FHA. They’re designed for higher-value homes exceeding the FHA lending limits and may be more expensive than an HECM.
Single-purpose reverse mortgages. Offered by nonprofits and state and local government agencies, these loans are aimed at lower-income borrowers and can only be used for one specific purpose, such as home repairs or property taxes. They’re considered the least expensive type of reverse mortgage and are not federally insured.
HECMs make up the vast majority of reverse mortgages in the U.S., largely due to their federal insurance backing through the FHA, which provides additional security for both lenders and borrowers.
Eligibility requirements
To qualify for a reverse mortgage, you must meet the following requirements:
Age 62 or older
Outright ownership of your home or a low-balance mortgage
Live in the home as your primary residence
Proven financial resources to pay ongoing property costs
No delinquencies on any federal debt
Attendance at a HUD-approved reverse mortgage counseling session
Before you can be approved for a reverse mortgage, you must meet with a third-party counselor who will make sure you understand how the reverse mortgage works, eligibility requirements, financial responsibilities and available alternatives. This roughly hourlong session is designed to provide the education you need and space for questions to make a sound decision.
Fund distribution options for a reverse mortgage
You can receive the funds from a reverse mortgage in four ways, depending on the lender and loan:
One-time lump sum payment — the only option available for a fixed-rate reverse mortgage
Fixed monthly payments for a set amount of time
A line of credit that can be accessed until it’s used up
A combination of these options
Your choice depends on your financial needs, the interest rate type and lender requirements. For example, some lenders require staging access to your equity — such as providing an initial lump sum followed by a credit line that becomes available after 365 days or another specific period of time.
💡Expert tip: Make sure you understand how your funds will be distributed, as it can greatly affect your total loan cost. Choosing a fixed-rate lump sum distribution over a variable-rate credit line, for instance, could result in higher interest charges if the funds sit unused in your bank account. For irregular or ongoing costs, a credit line or fixed monthly payments could be cheaper, because you pay interest only on what you use.
Benefits of a reverse mortgage
Eliminates monthly mortgage payments. Unlike home equity loans and HELOCs, reverse mortgages don’t require monthly payments that can eat into fixed retirement budgets.
Supplements your retirement income. A reverse mortgage can provide a steady stream of income to supplement Social Security and other retirement funds.
Pays off your existing mortgage. If you still have a traditional mortgage, you can use a reverse mortgage to pay it off, eliminating your monthly mortgage payments.
Provides room to age in place. Funds from a reverse mortgage can be used to make home renovations that provide quality of life as you age, allowing you to stay in your home longer.
Protects your heirs. HECMs are “nonrecourse” loans, meaning you or your heirs aren’t responsible for any loan balance that exceeds your home’s value when the loan becomes due. (This may not hold true for propriety or single-use reverse mortgages, however.)
Rates can be lower than home equity loans. In some cases, reverse mortgage interest rates can be more competitive than those for HELOCs or home equity loans, potentially saving you on interest costs over time.
Rates are capped. Reverse mortgages typically have annual and lifetime interest rate caps, providing some protection against dramatic rate increases over the life of the loan.
A reverse mortgage success story: How Martha freed up income and stayed in her home
Martha, 75, is a retired teacher living in suburban Chicago. Living on a fixed income from her pension and Social Security, Martha struggled to keep up with her existing mortgage payments and needed funds for home repairs. She took out a reverse mortgage, using $150,000 of her $300,000 home equity.
The reverse mortgage allowed her to:
Pay off her existing $100,000 mortgage, eliminating monthly payments
Fund $50,000 in necessary home repairs, including a new roof and accessibility modifications
Establish a $50,000 line of credit for future needs
While her family will be responsible for making sure the reverse mortgage is paid off after Martha dies, the funds are enabling Martha to stay in her home and improve her monthly cash flow.
Dig deeper: What happens to your mortgage after you die?
What to watch for with a reverse mortgage
Borrowing costs can be high. Reverse mortgages typically have higher closing costs and fees compared to other types of loans. For example, the closing costs on a $350,000 HECM could easily set you back $20,000 or more. By contrast, many HELOCs come with low or no closing costs (although monthly repayments are required).
Reduces your home’s equity. As the loan balance grows over time due to interest and fees, It could potentially consume all of your home’s equity by the time the house is sold. This is an important consideration if you want to leave something to your heirs.
Potentially high interest costs. Interest charges accumulate on the borrowed amount, increasing the loan balance. For example, a $100,000 reverse mortgage at 7.5% could grow to a whopping $206,000 in 10 years.
Ongoing insurance costs. You’re required to pay an upfront and ongoing mortgage insurance premium — 2% of home’s value to start and 0.5% annually — further increasing your loan’s balance and monthly interest.
Can affect your retirement benefits. Reverse mortgage proceeds may affect your eligibility for means-tested government programs like Medicaid or Supplemental Security Income.
Foreclosure risk. Failing to pay property taxes or insurance or maintain your property could result in foreclosure and the loss of your home.
A reverse mortgage cautionary tale: How John nearly lost his home
John, 68, a widower in Florida, took out a reverse mortgage on his $250,000 home to fund travel and supplement his retirement income. He received $100,000 as a lump sum and set up a $50,000 line of credit. However, John misunderstood his ongoing obligations:
He failed to pay property taxes for two years, accumulating $8,000 in back taxes
He let his homeowners insurance lapse to save money
When the lender discovered the back taxes and lapsed insurance, it quickly initiated foreclosure proceedings. John nearly lost his home before his adult children intervened, paying the hefty tax bill and reinstating his homeowners policy. The experience strained family relationships and significantly reduced the inheritance John had hoped to leave his children.
When a reverse mortgage might make sense
Reverse mortgages aren’t for everyone. This financial tool is most suitable for retirees who are “house rich, but cash poor» — meaning your wealth is tied up in your property and you don’t have liquid cash on hand — and for whom leaving a large inheritance (or any inheritance at all) to loved ones isn’t a top priority.
You might be a good candidate if you’re at least 62, have significant home equity but limited income and are looking to supplement your retirement funds. However, you should carefully consider your long-term financial goals and how a reverse mortgage might affect your estate plans and heirs before going down this route.
When you should avoid a reverse mortgage
To avoid costly mistakes and conflicts, you’ll want to steer clear of reverse mortgages if:
You’re planning to move or downsize soon. If you don’t intend to stay in your home long term, the high upfront costs of a reverse mortgage may not be worth it. Consider alternative short-term financing options instead, like a HELOC, which typically comes with low or no closing costs.
You want to leave your home to heirs. If leaving your home to your children or other heirs is a priority, a reverse mortgage likely won’t align with those goals. Instead, talk with a trusted financial advisor about alternative strategies for extra cash in retirement.
You have financial options. If you have other assets or income sources, it’s a good idea to consider those resources before committing to a reverse mortgage, as closing costs, accrued interest and fees will erode the equity in your home.
You can’t afford property taxes and insurance. Failing to pay ongoing taxes, insurance and other costs could result in the foreclosure of your loan. Make sure to have a stable plan for covering these expenses before considering a reverse mortgage.
How to shop for a reverse mortgage
If you’ve decided that a reverse mortgage might be right for you, you’ll want to approach the process with diligence and understanding the fine print, shopping for the best deal and reviewing your decision with a trusted financial advisor through these eight steps:
Make sure you’re eligible. You must be at least 62 years old living in your primary residence with enough money to cover ongoing taxes, insurance and maintenance, among other requirements that depend on the lender and loan type.
Attend a mandatory counseling session. Before you can apply, you’re required to meet with a HUD-approved reverse mortgage counselor to confirm you understand your options, responsibilities and alternatives.
Compare mortgage lenders. Research multiple lenders — including banks, credit unions and mortgage companies. Check ratings and read through customer reviews on sites like Trustpilot, Reddit and the Better Business Bureau.
Weigh your payment options. Evaluate whether a lump sum, line of credit, fixed monthly payments or a combination payout best suits your needs.
Request loan estimates. Get detailed loan estimates from at least three lenders that outline all costs, interest rates and important terms. Pay close attention to closing costs, insurance premiums, funds disbursement schedules and interest rate caps.
Ask questions. Always ask lenders to clarify any terms or conditions you don’t understand. Reverse mortgages can be complicated, and the paperwork required can be extensive — especially for certain home types, like condominiums.
Negotiate your fees and terms. While some fees may be negotiable, don’t be afraid to ask for better rates or terms before signing a contract.
Review with a financial advisor. Ask a trusted financial advisor to review the offers you receive to make sure a reverse mortgage aligns with your overall financial strategy.
Remember, there’s no rush: Take your time to understand all aspects of the reverse mortgage process before making a decision.
Alternatives to a reverse mortgage
Before committing to a reverse mortgage, it’s worth exploring alternatives that might be a better fit with your property, home and retirement goals
Downsizing or selling your home. Moving to a smaller, less expensive home could free up equity without the costs of a reverse mortgage. For example, many retirees choose to move from high cost of living areas — such as Massachusetts or New York — to states like Florida, Arizona and Texas, which have fewer taxes and can be cheaper to live in.
Home equity loans or HELOCS. If you have the budget to make monthly payments, a home equity loan or HELOC may be less expensive than a reverse mortgage. HELOCs are revolving credit lines, while home equity loans offer a fixed lump sum amount.
Mortgage refinancing. Refinancing your current mortgage to a lower interest rate could reduce your monthly payments, depending on the value of your home. Calculate the breakeven point to ensure the refinancing costs are offset by savings before you would potentially sell or move.
Government assistance programs. Various local and federal programs offer financial assistance to seniors and retirees for housing-related expenses. Start with your local Area Agency on Aging to learn about the range of services available to you.
Dig deeper: 4 ways to get equity out of your home — home equity loans, HELOCs and mortgage alternatives
FAQs: Reverse mortgages and your retirement
Learn more about how reverse mortgages work and can affect life after retirement.
How much can I borrow with a reverse mortgage?
The amount you can borrow with a reverse mortgage depends on your age, your home’s appraised value, current interest rates, the reverse mortgage program you choose and the principal limit factor — or the amount of cash you’re given based on the value of your home.
There’s no clear way to know the exact amount you’ll receive until you apply, though here’s a general example: A 70-year-old homeowner with a home appraised at $600,000 might be eligible to borrow around $300,000 through a reverse mortgage. This estimate assumes a 7.5% interest rate and a principal limit factor (PLF) of 50%. However, the actual amount available could be less after factoring in closing costs and any existing mortgage balances.
What fees are associated with a Home Equity Conversion Mortgage?
HECMs charge several fees that can include:
Mortgage insurance premiums. MIP is typically an initial 2% fee and an annual 0.5% charge on the outstanding balance.
Third-party charges. You’ll pay for your home’s appraisal, title search, inspections and other closing costs.
Origination fees. Lenders can’t charge more than $2,500 or 2% of the $200,000 of your home’s value plus 1% of the value beyond it, with total origination fees capped at $6,000.
Servicing fees. Lenders are allowed to charge between $30 and $35 each month for loan administration, though you can finders that don’t.
Interest. Rates are your ongoing costs of borrowing and vary depending on whether you choose a fixed-rate or variable-rate mortgage.
Will I need to pay taxes on the money I receive from a reverse mortgage?
No. The money you receive from a reverse mortgage is considered loan proceeds, not income, and so it’s not considered taxable income. Interest factors in after a “triggering event” — when you move, sell your home or die — which is when your loan is due with interest.
Will a reverse mortgage affect my Social Security or Medicare benefits?
Typically no. These programs aren’t means-tested, meaning your eligibility and benefit amounts do not depend on your income or assets. However, it may affect need-based benefits like Medicaid or Supplemental Security Income (SSI, if you receive them.
Is the interest paid on a reverse mortgage tax-deductible?
It depends. Home equity debt may be deductible if it’s used to “buy, build or substantially improve your home,” according to the IRS. In the case of reverse mortgages, you don’t typically pay interest until the loan is paid off.
Talk with a tax attorney or trusted financial advisor to learn how a reverse mortgage and the taxes that come with it can affect your specific financial situation.
Can I lose my home with a reverse mortgage?
Yes. You’re at risk of losing your home if you fail to pay property taxes, keep up your homeowners insurance or maintain the home. The loan can also become due if you move out for more than 12 months.
Can I get a reverse mortgage if I still owe money on my home?
Yes. But when you close on the reverse mortgage, you must be able to pay off the first mortgage either with the funds from the reverse mortgage or your own savings.
What types of properties qualify for a reverse mortgage?
To qualify for a reverse mortgage, your home must be a property type that meets all FHA property standards and flood requirements, including:
Single-family home
2- to 4-unit home with one unit occupied by the borrower
HUD-approved condominium project
Individual condominium unit that meets FHA single-unit approval requirements
Manufactured home that meets FHA requirements
Sources
About the writer
Kat Aoki is a seasoned finance writer who’s written thousands of articles to empower people to better understand technology, fintech, banking, lending and investments. Her expertise has been featured on sites like Forbes Advisor, Lifewire and Finder, with bylines at top technology brands in the U.S. and Australia. Kat strives to empower consumers and business owners to make informed decisions and choose the right financial products for their needs.
Article edited by Kelly Suzan Waggoner
