A reverse mortgage is a house loan that permits older homeowners to borrow against their home’s equity. Unlike a standard loan, a reverse mortgage doesn’t require the homeowner to make monthly mortgage payments. As a substitute, the borrower receives money from the lender — either monthly, via a line of credit or in a single lump sum at closing.
These loans are typically reserved for borrowers 62 and up (though some lenders allow for ages right down to 55). Homeowners often use them to scale back their monthly housing costs or increase their income in retirement.
Keep reading to learn more about reverse mortgages, how they work and whether or not they might suit you in retirement.
Table of contents
What’s a reverse mortgage?
A reverse mortgage is a loan that permits seniors to borrow a portion of their home’s equity. They’ll access these funds as one upfront sum, via regular monthly payments or on an as-needed basis.
The sum of money borrowed via a reverse mortgage is just due when the borrower:
- Dies (heirs are chargeable for paying the loan in the event that they wish to maintain the property)
- Lives outside the home for greater than 12 months (unless a co-borrower or eligible spouse stays on the property)
- Stops paying taxes and homeowners insurance
- Can now not adequately maintain the property
Many older homeowners use reverse mortgages to complement their income in retirement. Reverse mortgages may help reduce housing expenses (because there are not any monthly payments), increase money flow or pay for home repairs or improvements.
Forms of reverse mortgages
There are 4 several types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), HECMs for purchase, proprietary reverse mortgages and single-purpose reverse mortgages.
Like regular mortgages, these loans can feature fixed or adjustable rates. Fixed-rate mortgages provide you with a set rate of interest for your complete loan term, while your rate of interest can fluctuate over time with an adjustable-rate reverse mortgage.
Some lenders offer multiple kinds of loans, each serving a novel purpose. Understanding the differences between each will help guide you to the precise financial product to fulfill your needs.
Home Equity Conversion Mortgage (HECM)
Essentially the most common sort of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is federally backed and controlled by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD). It’s only available through a HUD-approved lender.
Every HECM borrower have to be 62 or older and take part in a HUD-approved HECM counseling session before taking out a reverse mortgage. During this session, you will learn concerning the HECM program’s requirements, repayment options and tax implications. Your counselor can even discuss your individual needs and funds.
HECMs include FHA insurance and are non-recourse loans, meaning you will never owe greater than your home sells for, even in case your outstanding loan balance is larger. Nevertheless, you need to pay a mortgage insurance premium (MIP) with a HECM. This service costs 2% of your loan upfront and 0.5% of your outstanding balance annually.
HECMs offer several options for receiving your funds, depending in your financial needs:
- A single lump-sum payment: You receive one great amount upfront after closing. This feature is just available on fixed-rate reverse mortgages.
- Monthly payments: You receive a monthly payment for a particular variety of months (called term payments) or so long as the home is your primary residence (called tenure payments).
- A line of credit: You’ll be able to withdraw funds as you wish them. Nevertheless, the unused principal balance grows over time based in your rate of interest with this selection.
- A mix of the above: You may also integrate monthly term or tenure payments with a line of credit. You’ll be able to’t mix the lump sum with another option.
With a HECM, the utmost amount you possibly can borrow is $1,209,750 for 2025, though the quantity you will qualify for is dependent upon the appraised value of your private home, your existing mortgage balance and other financial details. Your lender would require an appraisal of your property to find out its value before moving forward.
HECM for Purchase
HECMs for Purchase allow the borrower to purchase a latest home without making monthly mortgage payments.
The qualification and application process is similar as a standard reverse mortgage. You will need to be 62 or older, pay property taxes, homeowners insurance, and another property-related costs like homeowner association fees and keep the house in good condition.
Depending on the lender you select to work with, you’ll have to make a major down payment, ranging between 30% and 70% of the acquisition price. You’ll use money available or the proceeds from the sale of your current home for the down payment and the reverse mortgage funds to pay the balance. Any leftover money is yours to spend as you would like.
Proprietary reverse mortgage
Proprietary reverse mortgages can be found exclusively through private reverse mortgage lenders. Private reverse mortgage lenders set their very own terms, which can differ from HUD loan terms. Some call these loans jumbo reverse mortgages, as they’ll exceed the bounds set by HUD for HECM loans, with some lenders offering as much as $4 million.
These loans also do not have to stick to HECM’s age rules. Consequently, many lenders allow borrowers as young as 55. the cash could be used for any purpose, including a latest home purchase.
Because the federal government doesn’t insure proprietary reverse mortgages, you will not need counseling to qualify, nor will you pay monthly insurance premiums. Nevertheless, it’s possible you’ll pay the next rate of interest because lenders are taking up more risk than with government-backed loans.
Single-purpose reverse mortgage
Single-purpose reverse mortgages are loans designated for a particular, lender-approved goal, like paying property taxes or improving your private home.
State and native government agencies and non-profit organizations offer these loans, and so they typically have lower fees and rates of interest than other reverse mortgage products. Eligibility requirements are also less rigid, making them easier to qualify for than a HECM or jumbo reverse mortgage.
How does a reverse mortgage work?
A simple method to consider a reverse mortgage is as an advance on your private home’s eventual sale. The lender sends you the cash, either in monthly payments, periodic withdrawals or as a lump sum. Whenever you die or sell your home, you or your heirs will repay the loan, thypicall out of your private home’s sale proceeds.
During your reverse mortgage term, you will not must make payments to your lender — although you possibly can should you prefer. Nevertheless, you need to stay current on property taxes, insurance and homeowners association dues to avoid liens. You will need to also maintain the property — in case your roof needs replacing, it falls on you to pay for it. For those who fail to fulfill these obligations, your lender could call your loan due and even foreclose on your home.
Pros and cons of reverse mortgages
As with all loan, reverse mortgages have advantages and downsides. Understanding the professionals and cons of reverse mortgages can assist you in making the precise decision on your future funds.
You will likely hear so much concerning the advantages of a reverse mortgage, and far of this information is accurate. Reverse mortgages could be advantageous to many individuals because they:
- Provide access to additional funds for retirement
- Help you stay in your private home somewhat than having to sell for liquidity
- Can enable you repay your existing loans
- Can reduce your tax liabilities because the cash doesn’t count as income
Nevertheless, most lenders won’t be forthright with you concerning the drawbacks of those loans. Some cons related to a reverse mortgage include:
- The opportunity of losing the home to foreclosure should you cannot afford property tax and other fees
- Leaving less inheritance on your heirs
- The fees you will have to pay for closing
- A possible reduction to your retirement advantages like Medicaid or Supplemental Security Income (SSI). You might lose your advantages should you receive a lump sum reverse mortgage payment that pushes you over the federal asset limit and do not spend your complete balance within the month you receive it.
Reverse mortgages could be complicated, so it’s clever to learn as much as possible about how they work before signing up for anything. The more knowledge you will have on the professionals and cons, the simpler it becomes to make a final decision.
Find out how to apply for a reverse mortgage
So as to apply for an federally insured reverse mortgage, you need to meet HUD’s minimum eligibility requirements for a HECM loan. These requirements include the next:
- You will need to be at the least 62 years old, own your private home and live in it as your primary residence
- You will need to have a major amount of equity (typically 50% or more)
- You will need to have the income or assets to afford taxes and homeowners insurance premiums on the house
- Your private home have to be a single-family home, townhome, a one- to four-unit property during which you reside, a manufactured home built after 1976 or a HUD-approved condo
- You will need to keep the home in good condition
- You will need to attend a financial counseling session with a HUD-approved counseling agency
You will then apply for the loan directly through a HUD-approved lender. A listing of lenders in your area offering HECM loans is on the market directly through HUD’s website.
Eligibility requirements for proprietary reverse mortgages may differ from the above standards and can depend upon the particular lender you select. Many allow borrowers as young as age 55. They may even have additional income requirements or other conditions you need to meet before approval.
What are the fees related to reverse mortgages?
Reverse mortgages aren’t free and will cost you a major sum of money once you sell your private home. Some expenses you would possibly encounter include:
- A loan origination fee
- Mortgage insurance premiums
- A title insurance and report
- HECM counseling
You might even be on the hook for variable expenses like appraisals, recording fees, flood monitoring and any repairs the FHA requires before approving your property. You will be chargeable for interest on the quantity you borrow as well, and there could possibly be refinancing costs should you go down that road in the longer term.
Most of those fees depend upon the lender you select, so, as with a mortgage pre-approval, you possibly can shop around and find the very best deal. Nevertheless, there isn’t any escaping these expenses entirely when searching for a reverse mortgage.
Reverse mortgage FAQs
What’s the downside of a reverse mortgage?
There are several downsides to taking out a reverse mortgage. Since you’ll be using your private home as collateral for the loan, you might be tapping into the equity you’ve built up. As interest accrues, you may eventually find yourself without equity. Other cons include potentially reducing your Medicaid and Supplemental Security Income advantages. Make sure you understand all of the potential drawbacks before deciding on a reverse mortgage.
How much money are you able to get from a reverse mortgage?
The quantity you possibly can borrow with a reverse mortgage is dependent upon the sort of reverse mortgage loan you select, the age of the youngest borrower, current rates of interest and the way much equity you will have in the house. The utmost amount you possibly can receive on a federally insured HECM is $1,209,750 in 2025. Depending on the lender, this number can go as high as $4 million on proprietary reverse mortgages.
Who advantages from a reverse mortgage?
The older homeowner advantages from a reverse mortgage. The loan allows seniors to stay of their homes and complement their income without having to make monthly payments. The cash received from reverse mortgages is tax-free and could be used for any purpose, including making minor home repairs, paying medical expenses, or consolidating debt.
Who owns the home on a reverse mortgage?
The homeowner keeps the title to the house. The lender places a lien on the property the identical way they do on a daily mortgage. The loan won’t come due unless the borrower fails to fulfill HECM requirements (i.e., uses the property as their primary residence, pays homeowners insurance and property taxes and adequately maintains the house) or passes away. If the loan is not repaid once it comes due, the lender must initiate and complete foreclosure proceedings before they’ll legally take over the property.
Summary of Money’s guide to reverse mortgages
- A reverse mortgage is usually a priceless tool to support retirement goals.
- Homeowners can access reverse mortgages through FHA-approved and personal mortgage lenders.
- HECM loans can be found at age 62, but some private lenders offer reverse mortgages at 55.
- Lenders disburse these loans as a lump sum payment, line of credit, monthly annuity or combination annuity and credit line.
- Homeowners must be fully aware of their responsibilities as borrowers.
- Compare lenders to be certain you get the very best deal.
- A financial assessment is important before applying to see should you can afford living expenses, health care costs, insurance and taxes after taking this loan.