Reverse Mortgages Explained: Using Home Equity in Retirement
A reverse mortgage lets homeowners 62 and older borrow against their home equity without monthly loan payments, but the debt grows and comes due when they leave the home. This guide explains how HECMs work, what they cost, the obligations they carry and the alternatives worth comparing.
For many American retirees, the house is the largest asset they own and the one they spend from least. A reverse mortgage is a loan that converts part of that home equity into cash, with no required monthly payment on the loan. That feature makes it appealing and also makes it easy to misunderstand. This guide explains how the most common version works, what it costs and when other options may fit better. It is general information, not advice for any individual.
How a reverse mortgage works
With a regular mortgage, you borrow a sum and repay it monthly, so the balance falls over time. A reverse mortgage runs the other way. You receive money (a lump sum, a line of credit, regular payments or a mix), interest and fees are added to the balance, and the debt grows while you live in the home. Repayment is generally deferred until a triggering event, such as the last borrower dying, selling the home or moving out permanently.
You still own the home. The lender holds a lien on it, as with any mortgage.
The main types
- HECM (Home Equity Conversion Mortgage): the most common reverse mortgage in the US. It is insured by the Federal Housing Administration (FHA), part of HUD, and is offered through approved lenders.
- Proprietary reverse mortgages: private loans, sometimes for higher-value homes. They are not federally insured and their terms vary by lender.
- Single-purpose reverse mortgages: offered by some state or local agencies and nonprofits for a specific use, such as home repairs or property taxes. They are typically the lowest-cost kind where available.
The rest of this guide focuses on the HECM.
Who qualifies for a HECM
Broadly, the program requires that:
- The youngest borrower is at least 62.
- The home is your principal residence, and it is an eligible property type such as a single-family home or an approved condominium or manufactured home.
- You have substantial equity, often a paid-off home or a small remaining balance that the reverse mortgage can pay off.
- You complete counseling with a HUD-approved counselor before applying.
- You can continue to pay property taxes, homeowners insurance and upkeep costs, and the lender assesses your finances to confirm this.
How much you can borrow depends on the youngest borrower's age, the interest rate, the appraised home value (up to a federal lending limit) and program rules. Older borrowers generally qualify for a larger share of their home's value.
Ways to receive the money
| Option | How it works | Typical use |
|---|---|---|
| Lump sum | One payment at closing | Paying off an existing mortgage or a large one-time cost |
| Line of credit | Draw what you need when you need it | A reserve for surprises, such as medical or home repair costs |
| Tenure payments | Fixed monthly payments for as long as you live in the home | Supplementing income |
| Term payments | Fixed monthly payments for a set period | Bridging a gap, such as before a pension or delayed Social Security benefit |
| Combination | A mix of the above | Customizing to your plan |
A line of credit has a distinctive feature: under HECM rules the unused portion can grow over time. That can make it attractive as a standby source of funds, but it is not a guarantee of any particular amount, and rules and terms can change.
What it costs
Reverse mortgages are expensive loans compared with many alternatives. Typical costs include:
- Origination fee paid to the lender.
- FHA mortgage insurance premiums, both an upfront charge and an annual one. This insurance is what protects the borrower if the loan balance outgrows the home's value, and it is what makes the loan non-recourse.
- Closing costs, such as appraisal, title insurance, recording and credit checks.
- Servicing fees, which may apply.
- Interest, which compounds on the growing balance.
Because these costs are financed into the loan, you do not write a check for them, but they reduce the equity left. Over a long period, the combined effect can be large. Ask each lender for an itemized estimate and compare more than one.
Your obligations as a borrower
A reverse mortgage is not payment-free in every sense. You must:
- Live in the home as your primary residence.
- Pay property taxes and homeowners insurance on time.
- Keep the property in good condition.
- Respond to the servicer's annual occupancy and other certifications.
Failure to meet these conditions can place the loan in default and may lead to foreclosure. Borrowers who struggle to afford taxes and insurance are the most at risk, which is why the lender evaluates your finances up front.
When the loan comes due
The balance generally becomes due when:
- The last surviving borrower dies.
- The home is sold.
- The last borrower moves out permanently, which includes a prolonged stay in a care facility under the program's rules.
- The borrower breaks the loan's conditions.
If the home is worth more than the debt, the remaining equity belongs to you or your estate. If it is worth less, the HECM's non-recourse feature means you or your heirs generally owe no more than the home's value. A spouse who is not a borrower on the loan may have limited protections to remain in the home if the other spouse dies, provided certain conditions are met, which is a point to raise at counseling and with the lender. Heirs also have a limited period to decide whether to repay, sell or hand over the home, so they should talk to the servicer promptly.
Risks and common mistakes
- Shrinking inheritance. The growing balance leaves less equity for heirs, which matters to many families.
- Taxes and insurance default. The loan does not remove ongoing housing costs.
- Impact on benefits. Needs-based programs like Medicaid and SSI may treat borrowed funds differently, depending on how and when you spend them.
- Scams. Be wary of unsolicited offers, pressure to buy an annuity or other product with proceeds, or promises that sound too good. Lenders cannot require you to purchase an annuity or other financial product to qualify for a HECM.
- Moving later. If you may relocate within a few years, the upfront costs are spread over a short period, which makes the loan more expensive on a per-year basis.
Alternatives to compare
Before choosing a reverse mortgage, it is worth weighing:
- Downsizing or relocating, which frees equity without a loan, though it has moving and transaction costs.
- A home equity loan or HELOC, which requires monthly payments and income to qualify, but can be cheaper.
- Paying down expenses or reworking your budget. Our look at whether to pay off your mortgage before retiring covers the related trade-offs.
- Taking other income sources in a planned order. See how a withdrawal order can stretch savings.
- Local assistance programs for taxes, energy costs or repairs.
Planning for care costs is a related issue: long-term care in retirement explains what Medicare covers and how people pay.
A practical approach
Start with the counseling session, which is required and designed to be independent: bring questions about costs, alternatives and what happens to your spouse and heirs. Get written estimates from more than one lender, read the loan documents slowly and consider having a trusted family member, attorney or fee-only adviser look them over. A reverse mortgage can be a useful tool for the right household, but it works best as one carefully compared option among several, not as a first resort.
Frequently asked questions
Do you lose your home with a reverse mortgage?
No, the lender does not take title when the loan is made, and you remain the owner. However, you can face foreclosure if you stop meeting the loan's conditions, such as paying property taxes and homeowners insurance, maintaining the home or living there as your primary residence. The loan also becomes due when the last borrower dies, sells or permanently moves out.
What happens to a reverse mortgage when the borrower dies?
The loan becomes due and the heirs must repay it or let the home be sold. With the federally insured HECM, the amount owed is generally limited to the home's value, so heirs can repay the loan to keep the house, or sell or hand it over without personal liability for any shortfall. The servicer will outline the timelines and options.
Is reverse mortgage money taxable?
Proceeds are generally treated as loan advances rather than income, so they are not usually taxed as income and do not normally reduce Social Security or Medicare benefits. They can, however, affect eligibility for needs-based programs such as Medicaid or Supplemental Security Income, so it is worth asking a benefits counselor or tax professional before borrowing.
