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If you’re an older homeowner and need help managing expenses, 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 it’s right for you.
A reverse mortgage is a type of loan that allows homeowners ages 62 and older to borrow against their home’s equity for tax-free payments. The reverse mortgage lender makes these payments to the homeowner. The homeowner doesn’t have to repay the reverse mortgage until death, or when they permanently move out or sell the home.
Typically, homeowners use reverse mortgages to supplement retirement income, pay for home repairs or cover medical expenses.
“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, spokesperson for the National Foundation for Credit Counseling.
In addition, some reverse mortgage options allow the borrower to do a reverse purchase: use the payments to buy a new primary residence. This gives you the option to downsize or relocate from your current home as needed.
Reverse mortgages come in two basic varieties: Home Equity Conversion Mortgages (HECMs) and non-HECM loans. HECMs are insured by the Federal Housing Administration (FHA). Non-HECM loans include proprietary reverse mortgages from private lenders and single-purpose reverse mortgages, issued by state or local governments or nonprofits.
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 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:
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.
With a HECM reverse mortgage, you’re required to pay mortgage insurance premiums along with other closing costs. Here’s a breakdown of these fees:
Most reverse mortgage borrowers obtain a HECM, but there are other types of reverse mortgages, as well. Here’s a breakdown:
To be eligible for a HECM reverse mortgage, the primary borrower must be age 62 or older. The other requirements for a HECM include:
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.
Still, a reverse mortgage loan isn’t without drawbacks. When it comes time to repay the balance, the amount can seem startlingly high, especially if you haven’t repaid any of it, or only made interest payments, during the borrowing period.
In addition, if the balance exceeds the home’s value upon your death, your heirs might need to hand ownership of the home back to the lender.
There could also be complications involving others who live in the home if they’re not co-borrowers or an eligible non-borrowing spouse — someone who married the borrower and moved in after the loan was taken out.
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: paying our bills, gifting our children/grandchildren funds for college and having extra spending money/savings,” say Richard and Linda Mason, who got a reverse mortgage through Churchill Mortgage on their home in Houston, Texas. “Unless a time comes that we would need to move for health or family reasons, we plan to stay in the home long-term. We were also advised we could sell the home and do a reverse purchase if needed on a future home, should we decide to move.”
If you’re not sold on taking out a reverse mortgage, consider these other options:
The amount of money you can get from a reverse mortgage depends on many factors, including the value of your home, your age and current interest rates. Note that you won’t be able to take out the full value of your home.
The biggest difference between a reverse mortgage and a regular mortgage is the purpose of the loan: Borrowers take out regular mortgages to buy homes, then repay those funds to the mortgage lender over a period of time, typically 15 or 30 years. With a reverse mortgage loan, the lender makes payments to the borrower, up to a limit, until the borrower dies or moves out or sells the home.
There are a few well-known national reverse mortgage lenders, and many regular mortgage lenders also offer reverse mortgages. As with a home purchase mortgage or refinance, take the time to shop around and compare loan offers.
Be wary of the signs of a reverse mortgage scam, including unsolicited loan offers, confusing or high-pressure sales tactics, a lender charging you for simple information or a lender attempting to pay you for a home you don’t own. If you’re not sure whether a reverse mortgage offer is legitimate, talk to a reverse mortgage counselor. You can find one using the U.S. Department of Housing and Urban Development’s website.
As with any mortgage, there are conditions for keeping your reverse mortgage in good standing, and if you fail to meet them, you could lose your home. For example, you could lose your home if:
The right of rescission allows you to cancel most reverse mortgages without penalty as long as you make the request in writing within three days of closing and send it to your lender via certified mail. Your lender then has 20 days to return any funds you’ve already paid toward your loan.
Lena Muhtadi Borrelli has several years of experience in writing for insurance domains such as allconnect, Healthline and Reviews.com. She previously worked for Morgan Stanley.
