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- A reverse mortgage is for homeowners age 62 or older who want to tap into their home equity.
- The lender pays you money based on how much equity you have in the home.
- You can get reverse mortgage payments in one lump sum, as monthly payments, or as a line of credit.
If you're 62 years or older, you might be eligible for a reverse mortgage.
These types of mortgages allow you to turn your home equity into cash without selling or taking on any monthly payments. You can continue living in the home while using your home equity to support your needs as you age — or as a supplement to retirement income.
Still, despite their perks, reverse mortgages aren't for everyone. Here's what you need to know about these loans and how one might fit into your life.
How does a reverse mortgage work?
A reverse mortgage is a type of home loan only available to people age 62 or older. Unlike traditional mortgages, with a reverse mortgage, the lender pays you, and the money comes out of the equity you've acquired in the house. Over time, your debt increases.
Eligibility
Reverse mortgages are only for older homeowners. You must be 62 or older to get a Home Equity Conversion Mortgage (HECM) — the government-backed reverse mortgage program, but some lenders offer proprietary reverse mortgages that cater to borrowers as low as 55.
There's no minimum credit score requirement for HECMs, though your lender will make sure that you've been paying your taxes and insurance on time — and that you can continue to do so.
You also can't have a large mortgage balance on the property. You'll generally need to have at least 50% equity in the home, meaning you can't have a mortgage for more than half of what the house is worth.
Finally, your home must be your primary residence and a qualifying property type — a single-family home, one-to-four unit property you live in, or a HUD-approved condo or manufactured home.
Loan Options
There are several ways to get your money with a reverse mortgage loan. You can choose between:
- A lump sum payout and receive the full amount when you close on your reverse mortgage.
- A line of credit, and rather than receiving monthly payments, you can borrow money as you need it over time. It works much like a credit card.
- Monthly payments, which can come as equal monthly payments for a set period or as long as you live in the home.
You can also combine the line of credit option with monthly payments, giving you access to both regular, consistent income and extra cash in case you need it.
Repayment
You won't make monthly payments on a reverse mortgage. Instead, the balance will come due when you either move out of the home permanently, sell the home, or pass away.
At that point, the home will be sold to pay off the reverse mortgage balance. If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.
Types of reverse mortgages
As noted above, there are generally two types of reverse mortgages to choose from: The HECM and proprietary mortgage programs. Here's what those look like:
Home Equity Conversion Mortgages (HECMs)
These are the most common type of reverse mortgage, and they're guaranteed by the Federal Housing Administration. You'll need to be 62 to qualify and must undergo counseling with a HUD-approved housing counselor.
The maximum loan amount for reverse mortgages allowed by HUD is $1,149,825 in 2024.
Proprietary reverse mortgages
These are reverse mortgages that are unique to the lender offering them. They may have different loan amounts, terms, and eligibility requirements, and many allow for borrowers as young as 55 in some cases.
Proprietary reverse mortgages can exceed the HUD limits, so they may also be known as jumbo reverse mortgages.
Benefits of reverse mortgages
For older homeowners, reverse mortgages can come with quite a few valuable benefits. These include:
Access to home equity
Reverse mortgages allow you to turn the equity you've built up in your home into cash without taking on monthly payments or selling your house. You can then remain in your home and age in place.
Income supplement
Payments from a reverse mortgage can be useful if your retirement savings and Social Security checks just aren't cutting it. If an extra source of income would help ease your budget worries or make your retirement more comfortable, a reverse mortgage could be worth it.
No monthly payments
Unlike other mortgages and types of loans that let you tap into your home's equity, you don't have to make monthly payments on a reverse mortgage. Instead, you or your estate will owe the full balance when you sell, move out, or die.
Tax-free proceeds
Funds you receive from your reverse mortgage aren't considered income, so you won't pay taxes on them. This is in contrast with many of the other sources of income older adults rely on in retirement, such as traditional IRAs and 401(k)s.
Flexibility
There's no limit to what you can do with the cash you get from a reverse mortgage. Use it to cover home repairs, healthcare costs, travel, bills, and more.
Risks and drawbacks of reverse mortgages
Reverse mortgages aren't perfect, and they have some serious drawbacks to consider before taking one out. These include:
High costs
There are quite a few upfront costs to taking out a reverse mortgage, including:
- Mortgage insurance premiums: There's a 2% MIP closing cost, then an annual MIP of 0.5% of the amount you've borrowed.
- Origination fees: Lenders can charge $2,500 or 2% of the first $200,000 of the property value plus 1% of any amount over that (whichever is greater). Fees can't exceed $6,000.
- Real estate closing costs: You'll pay fees to third parties for things like a home appraisal, home inspection, and credit checks.
You'll also pay interest and fees over the life of the loan and have other non-mortgage housing costs, such as homeowners insurance, property taxes, and homeowners association dues, to cover.
Reduced inheritance
For some homeowners, passing their property along to their heirs after they die is important, and getting a reverse mortgage complicates that. If your heirs want to keep the home, they'll need another source of funds to pay off the mortgage.
Loss of homeownership
Reverse mortgages use your home as collateral. So if you fail to meet the terms of your loan (namely, staying current on taxes, insurance, and home maintenance), you could lose your property to foreclosure.
Impact on eligibility for government benefits
Since the proceeds from a reverse mortgage loan impact your household's financial resources, they could hurt your ability to qualify for certain government benefit programs (such as Medicaid) if they boost your assets beyond the program's limit.
Who should consider a reverse mortgage?
A reverse mortgage isn't right for everyone, but it can be a smart move for many older homeowners. Here's who reverse mortgages generally work for:
Older adults with significant home equity
If you have a lot of home equity, then a reverse mortgage can be a useful way to turn that into cash without taking on extra monthly payments. You can then cover expenses or supplement your existing retirement income.
Homeowners planning to stay put long-term
If you want to age in place, a reverse mortgage can help you do it. You'll have the funds necessary to cover bills, make accessibility updates to your home, and more — no selling necessary.
Those who are comfortable with reducing the inheritance they leave behind
When you take out a reverse mortgage, you cut into the potential inheritance you leave for your heirs once you pass. You should make sure your heirs are prepared to sell the home and repay the loan should you take one out.
Alternatives to reverse mortgages
If you're in need of extra funds but a reverse mortgage doesn't make sense for your situation, you might instead try:
Downsizing
If you're having trouble affording your current housing costs, you might consider moving into a smaller, more affordable home.
A home equity loan or home equity line of credit (HELOC)
These types of home loans let you take equity out of your home and use the funds however you like, similar to a reverse mortgage. These loans can be good for those who have a specific project or goal in mind for the money they're taking out — such as making modifications or upgrades to the home.
Plus, a home equity loan or HELOC lender may be able to offer you a better mortgage rate than you'd get with another type of loan, such as a personal loan.
Refinancing your current mortgage
Refinancing replaces your existing mortgage with a new one. A traditional rate-and-term refinance can help lower your monthly payment if you're able to snag a lower rate or lengthen your loan term. A cash-out refinance turns a portion of your equity into cash that you'll get at closing.
Refinancing can give you more wiggle room in your monthly budget or help you pay for a big expense, but do the math to be sure it actually makes sense for your situation. If you do decide to refinance, make sure to shop around with multiple mortgage refinance lenders — you don't necessarily need to go with the lender you have your current mortgage with.
Reverse mortgage FAQs
Yes, you can still get a reserve mortgage if you still have a mortgage balance on your home. In most cases, you just need to have at least 50% equity in your home.
If you outlive the loan proceeds of a reverse mortgage, you can continue living in the home as normal, as long as you stay current on taxes, insurance, and home maintenance.
Look up reviews and ratings, research lenders through the Better Business Bureau, and ask for personal recommendations. There are many scams in the reverse mortgage industry, so it's important to choose a trustworthy and reliable lender.
If you become delinquent on your property taxes, violate the terms of the reverse mortgage, or fail to pay it back once the loan comes due, a reverse mortgage lender can foreclose on the house, and you could lose the property as a result.
Reverse mortgages need to be paid back when you sell the home or die.
No, you don't pay taxes on a reverse mortgage, since the money you're getting is considered loan proceeds, not income.
