A reverse mortgage lets homeowners 62 and older turn part of their home equity into cash without a required monthly mortgage payment. It can be a valuable retirement tool, and it's a loan with real costs and obligations. Here's a balanced look.
How It Works
Instead of paying the lender each month, interest and fees are added to the loan balance, so the balance grows over time. The loan is repaid when the last borrower sells the home, moves out permanently, or passes away. Most reverse mortgages are FHA-insured Home Equity Conversion Mortgages (HECMs).
How Much You Can Get
The amount depends mainly on the age of the youngest borrower (or eligible non-borrowing spouse), current interest rates, and your home's value up to the FHA limit. Older borrowers and lower rates generally mean more available funds. Any existing mortgage must be paid off with the proceeds first.
Payout Options
- Lump sum, usually with a fixed rate
- Tenure: monthly payments for as long as you live in the home
- Term: monthly payments for a set number of years
- Line of credit: unused HECM credit lines grow over time
- A combination of these
Costs
HECMs have an upfront FHA mortgage insurance premium of 2% of the home's value (up to the limit), an annual premium of 0.5% of the balance, plus origination fees, closing costs, and interest. Most of these can be financed, but they reduce your remaining equity.
Your Obligations
- Live in the home as your primary residence
- Pay property taxes, homeowners insurance, and HOA dues on time
- Keep the home in good repair
Falling behind on these can make the loan due. Lenders review your finances up front, and may set aside funds for taxes and insurance.
What Happens to Heirs
When the loan comes due, heirs can repay it, often by refinancing, and keep the home, or sell it. With a HECM, they generally won't owe more than the home's value, even if the balance has grown larger. Spouses who aren't on the loan have specific protections, so discuss your situation in counseling.
Alternatives to Consider
- Downsizing, possibly with a HECM for Purchase
- A HELOC or home equity loan, if you can make payments
- A refinance to lower your current payment
Every HECM borrower must first meet with a HUD-approved counselor. It's a valuable conversation, and family members are welcome to join.
Reverse Mortgage FAQ
How old do you have to be for a reverse mortgage?
For a HECM, the youngest borrower must be at least 62.
Can you lose your home with a reverse mortgage?
The loan can become due if you stop living in the home or don't pay taxes, insurance, or upkeep.
What happens to a reverse mortgage when the owner dies?
Heirs can repay the loan and keep the home, or sell it. With a HECM, they generally won't owe more than the home is worth.
In the financial industry since 2015. Licensed loan officer in Los Angeles, California. NMLS #1493724, with UTM Financial, LLC (NMLS #2591548). More about Ivan
This article is general education, not financial, tax, or legal advice. Loan guidelines vary by lender and change often. Not a commitment to lend.