What is a reverse mortgage?

A reverse mortgage, also known as an equity release lifetime mortgage in the UK, is a financial product designed to allow homeowners, typically aged 55 and older, to convert a portion of their home equity into tax-free cash payments. Unlike a traditional mortgage, you don’t make monthly payments to a lender. Instead, the lender pays you, and the loan becomes due when you no longer live in the home as your primary residence, either because you move out or pass away.

Key Takeaways

Eligibility: Generally for homeowners aged 55 and older.
Purpose: Allows you to tap into your home’s equity for tax-free payments.
Repayment: The loan is repaid when you permanently move out of the home or pass away.
Ongoing Responsibilities: You must continue to own the home, pay property taxes, insurance premiums, and other upkeep costs.

A reverse mortgage is a loan secured against your house. It differs from a traditional mortgage because you do not make monthly payments to the lender. Instead, the lender pays you, drawing from the equity you’ve built up in your home. This process works in “reverse” compared to a standard mortgage.

Homeowners typically use reverse mortgages for various financial needs:

Supplementing retirement income.
Paying off high-interest debt.
Funding home repairs or improvements (e.g., adding accessibility features).
Covering medical expenses.

Some homeowners also strategically use reverse mortgages to delay taking Social Security benefits until age 70, when benefits reach their maximum. Additionally, some reverse mortgage products (like the HECM for Purchase in the US) allow the borrower to buy a new primary residence. As Bruce McClary notes, reverse mortgages can prevent seniors from resorting to more costly high-interest loans when regular income or savings are insufficient.

HECM vs. Non-HECM Reverse Mortgages (US Context)

In the US, reverse mortgages fall into two main categories:

Home Equity Conversion Mortgages (HECMs): These are the most common type and are insured by the Federal Housing Administration (FHA). They offer significant consumer protections.
Non-HECM loans: This category includes:
- Proprietary reverse mortgages: Offered by private lenders, these are not government-insured.
- Single-purpose reverse mortgages: Issued by state or local governments or non-profit organizations, usually for specific, limited purposes.

How Does a Reverse Mortgage Work?

Reverse mortgages can be complex. Here are the basic mechanisms:

How much can you borrow? You need substantial home equity, though you won’t be able to borrow the entire value of your home. For an HECM, the amount (principal limit) depends on the age of the youngest borrower (or eligible non-borrowing spouse), current interest rates, the HECM mortgage limit (which can change annually, e.g., $1,209,750 in 2025), and the home’s value. Older individuals, more valuable properties, and lower interest rates generally lead to a higher principal limit. Variable-rate HECMs might allow for higher borrowing limits.
How will you be paid? The payment options depend on the type of HECM:
- Variable interest rate HECMs offer flexibility: equal monthly payments (for as long as the property remains your primary residence or for a fixed period), a line of credit (accessible until exhausted), or a combination of both.
- Fixed interest rate HECMs typically provide a single, one-time lump-sum payment.
How do you repay a reverse mortgage? The loan becomes due when you no longer live in the home (move out permanently) or pass away. Repayment methods include:
- Selling the house: You or your heirs sell the home to cover the loan balance. Any remaining proceeds go to you or your heirs.
- Turning the house over to the lender: If the loan balance exceeds the property’s value (covered by FHA insurance for HECMs), heirs can give the house to the lender to satisfy the debt.
- Paying off the loan balance: If heirs wish to keep the home, they can pay the lender the full loan balance or 95 percent of the appraised value of the house, whichever is less.
- Ongoing Costs: While no monthly loan payments are required, you are still responsible for homeowners insurance, property taxes, any homeowners association (HOA) dues, and the home’s upkeep.

How Much Does a Reverse Mortgage Cost?

HECM reverse mortgages involve several costs, similar to standard mortgages:

Mortgage Insurance Premiums (MIPs): An initial 2 percent MIP is due at closing, plus an annual MIP of 0.5 percent of the outstanding loan balance. These can be financed into the loan.
Origination Fee: Lenders charge a fee (capped at $6,000) for processing the HECM loan.
Servicing Fees: Lenders may charge a monthly fee (capped at $30 for fixed/annually-adjusting rates, $35 for monthly-adjusting rates) to manage the loan.
Third-Party Fees: These cover services like appraisal, home inspection, credit check, title search, title insurance, and recording fees.
Interest: Interest accrues monthly and is added to the loan balance. Reverse mortgage interest rates tend to be higher than those for regular mortgages.

All these charges can typically be rolled into the loan balance.

Reverse Mortgage Requirements

To be eligible for an HECM (US context):

The primary borrower must be age 62 or older (some proprietary loans may allow 55+).
You must own your home outright or have paid down most of your mortgage (typically at least 50% equity).
The home must be your primary residence.
You must participate in an information session with a HUD-approved reverse mortgage counselor.
You must be current on all federal debt.
You must continue to pay homeowners insurance, property taxes, and any HOA dues.

Pros and Cons of a Reverse Mortgage

Pros:

Provides tax-free supplemental income.
Allows homeowners to “age in place” (stay in their home).
No required monthly repayment during the borrower’s lifetime, as long as they live in the home.

Cons:

The loan balance grows over time, potentially reducing equity passed to heirs.
Payments received might affect eligibility for certain needs-based government programs like Medicaid or Supplemental Security Income (SSI).
Heirs may face a large sum to pay off the loan if they wish to keep the house.
Can be complicated, especially if circumstances change (e.g., remarriage).
Risk of Foreclosure: Failure to pay property taxes, insurance, HOA dues, or maintain the home can lead to default and foreclosure.
Fees: Fees can be steep, as noted by experts like Jeff Ostrowski.
Scams: The industry has faced issues with deceptive practices and scams (e.g., contractors pushing for loans, financial advisors selling unnecessary products). Caution is advised.

Is a Reverse Mortgage Right For You?

A reverse mortgage can be suitable for seniors who need additional income, plan to stay in their homes long-term, and are comfortable with the idea of their heirs potentially inheriting a debt on the property. It can help supplement Social Security, cover medical expenses, fund in-home care, or make home improvements. However, potential borrowers should be wary of aggressive marketing and high fees.

Alternatives to a Reverse Mortgage

If a reverse mortgage isn’t the right fit, consider these options:

Home equity loan or Home Equity Line of Credit (HELOC): Both allow borrowing against equity (up to 85% typically) but require monthly payments (immediately for loans, after a draw period for HELOCs). Rates and fees are usually lower than reverse mortgages.
Refinancing: If you still have a mortgage, refinancing to a lower rate or longer term can reduce monthly payments. A cash-out refinance allows you to borrow more than your current mortgage balance and receive the difference in cash.
Shared equity agreement: Partner with a company that provides cash in exchange for a percentage of your home’s value and future appreciation. No monthly payments are required, but the money (an investment, not a loan) must be repaid at the end of the term.