Reverse Mortgages: How They Work

A reverse mortgage is a loan that lets eligible homeowners convert some of their home equity into funds without making required monthly mortgage payments while they continue to meet the loan’s obligations. The balance generally grows over time and is repaid when a maturity event occurs, such as the borrower selling the home or the last borrower moving out or passing away.

Who reverse mortgages may be for

A reverse mortgage may suit an older homeowner who wants to use home equity for expenses, supplement cash flow, or make another financial plan possible. It is not the right fit for everyone: borrowing reduces the equity available later and can affect a homeowner’s plans for the property or an inheritance.

The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). To qualify for a HECM, the youngest borrower generally must be at least 62, the home must usually be the borrower’s primary residence, and the borrower must meet FHA and lender requirements. Applicants also generally need sufficient equity and must complete a financial assessment. Approval and eligibility are subject to credit approval and program guidelines.

Other products, often called proprietary or private reverse mortgages, have different rules. Their age requirements, eligible properties, available loan amounts, fees, and consumer protections depend on the specific program. We can explain which options may be available based on your circumstances.

How the process works

1. Review your goals and options. Consider how long you expect to remain in the home, the funds you need, and how a loan balance could affect your future plans. Compare a reverse mortgage with alternatives such as downsizing, a home equity loan, or using other assets.
2. Complete required counseling for a HECM. HECM applicants must receive counseling from a HUD-approved counselor. Counseling is intended to help you understand the loan, costs, obligations, and alternatives before moving forward.
3. Apply and provide documentation. We review information such as age, income, assets, debts, property details, and occupancy. A financial assessment helps determine whether you can keep up with ongoing property charges. If needed, the lender may require funds to be set aside for certain charges.
4. Have the property evaluated. The lender typically arranges an appraisal and reviews whether the home meets program standards. Property type and condition can affect eligibility and the amount available.
5. Review the offer and closing documents. Loan proceeds depend on factors such as the youngest borrower’s age, home value, interest rate, program limits, and the amount owed on existing mortgages. Any current mortgage or liens generally need to be paid at closing, which can reduce funds available to you.
6. Choose how to receive proceeds, if eligible. Depending on the product and loan terms, options may include a lump sum, a line of credit, scheduled payments, or a combination. Not every option is available with every loan type. After closing, you must continue meeting the loan’s requirements.

Costs and ongoing responsibilities

Costs vary by loan type and circumstances. A HECM may involve an origination fee, appraisal and other closing costs, and FHA mortgage insurance. HECM mortgage insurance generally includes an upfront premium and an annual premium based on the outstanding loan balance. A proprietary reverse mortgage may have a different fee structure and may not include FHA mortgage insurance. Ask for an itemized estimate and review which costs are paid at closing, financed into the loan, or charged later.

Financing costs or receiving proceeds can increase the balance and reduce the equity remaining in the home. Interest and applicable fees accrue over time. HECM loans are subject to a national FHA lending limit; the amount available is not simply the home’s full market value. Other reverse mortgage products set limits under their own program rules.

Borrowers remain responsible for property taxes, homeowners insurance, required maintenance, and other applicable property charges. The home generally must remain the borrower’s primary residence, and the borrower must meet occupancy and other loan conditions. Falling behind on property charges or failing to maintain the home could put the loan in default and may lead to foreclosure. A financial assessment and any required set-aside are designed to address some of these ongoing obligations, but they do not remove them.

Benefits and trade-offs

• Access to home equity: Proceeds may provide financial flexibility without a required monthly mortgage payment, as long as you comply with the loan terms. You still have housing costs and other responsibilities.
• Continued homeownership: You generally retain title to the home. The lender has a lien securing repayment; the reverse mortgage does not transfer ownership to the lender at closing.
• A growing loan balance: Because interest and fees accrue and required monthly principal-and-interest payments are not generally due, the balance can grow over time. This may leave less equity for you or your heirs.
• Limits on future plans: Moving, selling, or a prolonged absence from the home may cause the loan to become due. A reverse mortgage may also make a later move or sale more complicated.
• Possible effects on benefits: Loan proceeds are generally not treated as taxable income, but funds retained in an account could affect eligibility for means-tested programs such as Supplemental Security Income or Medicaid. Rules depend on the program and your circumstances; consider consulting a tax or benefits professional.

What happens when the loan is due

A reverse mortgage generally becomes due when the last borrower dies, sells the home, or no longer uses it as a primary residence, subject to the loan documents and program rules. The borrower or heirs can typically repay the balance, often by selling the home or using other funds. If the home is sold, sale proceeds go toward the loan and any remaining equity belongs to the borrower or estate, subject to other claims and costs.

HECM loans are generally nonrecourse: the borrower or estate typically does not owe more than the home’s value when the loan is repaid, subject to program terms. Protections for an eligible non-borrowing spouse and options for heirs depend on the circumstances and applicable rules. Discuss these details before closing, especially if a spouse is not a borrower or family members hope to keep the home.

Common misconceptions

• “The lender owns my home.” Generally, you retain title, but the lender has a mortgage lien and can enforce the loan terms.
• “There are no payments, so there are no costs.” A reverse mortgage may not require monthly principal-and-interest payments, but fees and interest accrue, and property taxes, insurance, and upkeep remain your responsibility.
• “Every reverse mortgage works the same way.” HECM and proprietary programs can differ in eligibility, limits, fees, proceeds, and protections. Review the specific documents and requirements.
• “My heirs automatically have to repay more than the home is worth.” HECM nonrecourse protections generally limit repayment to the home’s value, subject to program rules. The timing and options for heirs still require careful review.

How to get started with us

Start by telling us what you hope to accomplish and sharing basic information about your age, home, existing mortgage, and plans for staying in the property. We can explain available reverse mortgage types, outline the process and likely costs, and help you identify questions to discuss with a HUD-approved counselor or other trusted professional. We will review your situation and applicable program requirements; any approval or loan terms are subject to credit approval and program guidelines. Take time to compare alternatives and make sure you understand the ongoing obligations before deciding whether to proceed.