Get the Facts on Reverse Mortgages

What Is a Reverse Mortgage?

A reverse mortgage is a unique financial product designed for homeowners aged 62 or older.1 Unlike a traditional mortgage where you make payments to a lender, a reverse mortgage allows the homeowner to borrow against the equity in their home and receive cash, with the lender making payments to the homeowner.2 The home itself serves as collateral for the loan.3

 

 

How a Reverse Mortgage Works

 

  • Eligibility: To qualify, homeowners must be at least 62 years old and have substantial equity in their home (often at least 50%).4 The amount that can be borrowed depends on the borrower’s age, the current interest rate, and the home’s appraised value.5 You cannot borrow more than your home’s value.

     

  • Payment Options: Borrowers have flexibility in how they receive the funds:6

     

    • Lump Sum: A single, upfront payment (typically with a fixed interest rate).7

       

    • Term Payments: Equal monthly payments for a fixed period chosen by the borrower.
    • Tenure Payments: Equal monthly payments for as long as the borrower lives in the home as their primary residence.8

       

    • Line of Credit: Funds can be drawn as needed, similar to a home equity line of credit (HELOC).9 The unused portion of the line of credit typically grows over time.10

       

    • Combinations: Blends of monthly payments and a line of credit are also available.11

       

  • Accruing Interest: Once the loan is taken out, interest accrues and is added to the total balance owed.12 If a line of credit is chosen, interest only accrues on the amount withdrawn.13 As the loan balance grows, the homeowner’s equity in the home decreases.14

     

  • Repayment: The loan does not require monthly payments while the borrower lives in the home.15 It becomes due and payable when the borrower sells the home, permanently moves out (e.g., to a long-term care facility for over a year), or dies.16 In the event of the borrower’s death, their heirs can choose to repay the loan to keep the house or sell the home to satisfy the debt.17

     

 

Types of Reverse Mortgages

 

While there are different options, the most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the U.S. Federal Housing Administration (FHA).18

 

  1. Home Equity Conversion Mortgages (HECMs):
    • The most popular type, often referred to as FHA reverse mortgages, as they are only available through FHA-approved lenders.19

       

    • Require a mandatory counseling session with a HUD-approved agency to ensure the borrower understands the loan’s implications.20

       

    • Home value must be below a conforming loan limit set by the Federal Housing Finance Agency (e.g., $806,500 for most U.S. counties in 2025).21

       

    • Funds from an HECM can be used for any purpose.22

       

  2. Single-Purpose Reverse Mortgages:
    • Offered by state and local governments or non-profit organizations.23

       

    • Generally less expensive due to lower fees and interest rates.
    • Crucially, funds can only be used for a specific, pre-approved purpose, such as home repairs or paying property taxes.24

       

  3. Proprietary Reverse Mortgages:
    • Also known as “jumbo reverse mortgages,” these are offered by private lenders and are not government-backed.25

       

    • Designed for homeowners whose homes exceed the FHA’s annual loan limit for HECMs, allowing for larger loan amounts.
    • Because they lack government backing, they often come with higher interest rates and fees.26

       

 

Eligibility Requirements

 

To qualify for a reverse mortgage, both the homeowner and the property must meet specific criteria:

  • Homeowner Requirements (for HECM/Single-Purpose):
    • Must be at least 62 years old.27

       

    • Must be a homeowner with at least 50% equity in the home.28

       

    • Must be able to pay associated costs like upfront mortgage insurance and closing costs.29

       

    • Must complete a HUD-approved counseling session (typically costing around $125 and lasting about 90 minutes).30 This session covers the pros and cons, financial options, and potential impact on other government programs.31

       

    • Ongoing Obligations: Borrowers must continue to pay property taxes, homeowners insurance, and maintain the property.32 Failure to do so can lead to loan default and potentially foreclosure.33 The loan also becomes due if the homeowner is absent from the primary residence for more than one year (e.g., residing in a long-term care facility).

       

  • Home Requirements (for FHA-backed HECM):
    • Must be the homeowner’s primary residence.
    • Eligible property types include houses, condos, townhouses, or manufactured homes built on or after June 15, 1976.34

       

    • Homes owned as part of a co-op are generally not eligible as you own shares, not the property itself.35

       

    • The home must meet FHA/HUD property standards, meaning it should be structurally sound and in good condition.36

       

 

Costs of a Reverse Mortgage

 

Reverse mortgages involve several costs, similar to traditional mortgages:37

 

  • Application fees
  • Mortgage Insurance Premium (MIP): This includes an upfront premium (UFMIP) paid to the FHA at closing and an annual MIP on the outstanding loan balance, protecting both the borrower (non-recourse loan) and the lender.
  • Homeowners insurance
  • Origination fee (lender’s processing fee, capped by FHA for HECMs)38

     

  • Monthly service fee (some lenders charge this)
  • Closing costs (e.g., appraisal fee, title search/insurance, surveys, recording fees, credit checks)39

     

  • Interest (accrues on the loan balance)40

     

For HECMs, loan officers are required to present the Total Annual Loan Cost (TALC) rates to provide a complete picture of all charges.41

 

 

Beware of Reverse Mortgage Scams

 

The increasing popularity of reverse mortgages has unfortunately led to a rise in related scams. Common tactics include:

  • Contractor Scams: A contractor persuades a homeowner to take out a reverse mortgage for home improvements, then takes the money and disappears or performs shoddy work.42 Always research contractors and use staggered payments.

     

  • Exploitation by Trusted Individuals: Family members or caregivers might pressure or coerce homeowners into granting them power of attorney, then secretly apply for a reverse mortgage and steal the funds.43 Be extremely cautious about granting financial control to others.

     

  • Unscrupulous Financial Advisors: Advisors might pressure borrowers to use reverse mortgage funds for high-priced financial products (like annuities) that are not in the borrower’s best interest, simply to earn large commissions.44 Research advisors thoroughly and be wary of anyone pressuring you into quick decisions or suggesting a reverse mortgage is your “only option.”

     

Warning: Never feel pressured into making a quick financial decision, especially regarding a reverse mortgage. Always take time to research, compare options, and seek independent advice.

 

The Bottom Line

 

Reverse mortgages are specialized and can be costly financial products, meaning they are not suitable for every homeowner.45 However, they can be a valuable tool for individuals aged 62 or older who need to access funds from their home equity while desiring to remain in their current residence. They can offer financial flexibility, particularly for those with limited other assets or who might not qualify for traditional personal loans.46