Reverse Mortgage
A reverse mortgage lets homeowners aged 62 or older convert their home equity into cash — you don’t make monthly payments, and you don’t have to move out, but the loan balance grows over time instead of shrinking.
The most common type is the HECM (Home Equity Conversion Mortgage), insured by FHA. Instead of you paying the bank, the bank pays you — as a lump sum, monthly payments, a line of credit, or a combination. You keep living in the home. When you die, sell, or move out permanently, the loan comes due.
How Reverse Mortgages Work
Say you’re 70, your home is worth $400,000, and you own it free and clear. A reverse mortgage might give you access to $200,000–$240,000 (the amount depends on your age, interest rates, and the home’s value). You can take that as:
- Lump sum: All at once, fixed rate. Good for paying off existing debt
- Monthly payments: Steady income stream, fixed term or for as long as you live in the home
- Line of credit: Draw what you need when you need it. The unused portion actually grows over time
- Combination: Mix of the above
No monthly mortgage payments are required. Interest and fees accrue on the loan balance, which means you owe more every month, not less. If you borrow $200,000 at 6.5%, your balance grows to roughly $270,000 after 5 years and $375,000 after 10 years.
HECM Eligibility Requirements
| Requirement | Details |
|---|---|
| Age | 62 or older (youngest borrower) |
| Property | Primary residence — single-family, 2–4 unit, HUD-approved condo, or manufactured home |
| Equity | Substantial equity (typically 50%+ of home value) |
| Counseling | Must complete HUD-approved counseling session |
| Property taxes + insurance | Must stay current — failure to pay can trigger default |
| Home maintenance | Must maintain property in good condition |
| Existing mortgage | Must be paid off with reverse mortgage proceeds (or separately) |
The Real Costs
Reverse mortgages are expensive. Upfront costs include:
- Origination fee: Up to $6,000 (2% of first $200K + 1% of amount over $200K)
- FHA MIP: 2% of the home’s appraised value upfront, plus 0.5% annually on the loan balance
- Closing costs: Appraisal ($400–$700), title insurance, recording fees — typically $3,000–$5,000 total
- Servicing fees: Up to $35/month for the life of the loan
On a $400,000 home, total upfront costs can reach $15,000–$20,000. These get rolled into the loan balance, further reducing the net amount you receive.
The Dangers
Eroding inheritance. Every dollar borrowed, plus compounding interest, comes out of your estate. If you borrow $200,000 and the loan balloons to $350,000 over 12 years, your heirs inherit a home worth $450,000 with a $350,000 lien on it. They can pay off the loan and keep the home, or sell it and keep whatever’s left.
Losing the home. You must stay current on property taxes, homeowners insurance, and HOA fees. Fall behind, and the lender can foreclose — even though you’re not making mortgage payments. A surprising number of reverse mortgage defaults happen for this reason.
Surviving spouse risk. If only one spouse is on the reverse mortgage and that spouse dies, the surviving spouse may need to repay the loan. Non-borrowing spouses have some protections under current rules, but the situation gets complicated. Make sure both spouses are on the loan.
Exhausting equity. A reverse mortgage works great at 70 when you have 20+ years of life expectancy and substantial equity. It works poorly at 62 if you’re healthy and might need the home’s value for care costs at 85.
Alternatives to Reverse Mortgages
Before committing to a reverse mortgage, consider cheaper options:
- HELOC: If you can make monthly payments, a HELOC gives you flexible access to equity at lower total cost. Rates are variable but closing costs are minimal
- Cash-out refinance: One lump sum at a fixed rate with lower fees than a reverse mortgage. Requires monthly payments though
- Downsizing: Selling the home and buying something smaller frees up equity without borrowing. You pocket the difference and eliminate a large mortgage payment
- Home equity sharing: Newer companies offer lump-sum payments in exchange for a share of your home’s future appreciation. No monthly payments, no interest, but you give up 10%–30% of the home’s gain when you sell
Each option has tradeoffs. The reverse mortgage’s unique advantage is zero monthly payments combined with the ability to stay in your home permanently. Nothing else offers exactly that combination.
When a Reverse Mortgage Actually Makes Sense
- You plan to stay in the home for the rest of your life
- You have no heirs or don’t prioritize leaving the home to them
- You need income and have few other sources
- Your home is your largest asset and you’re equity-rich but cash-poor
A HELOC is the most common alternative. See our reverse mortgage vs. HELOC comparison to decide which fits your situation.
Frequently Asked Questions
Can I owe more than my home is worth?
Yes, the loan balance can exceed the home’s value — but you (or your heirs) will never owe more than what the home sells for. HECM loans are non-recourse, meaning FHA’s insurance covers the difference. If you owe $380,000 and the home sells for $340,000, FHA absorbs the $40,000 loss. That’s what the MIP premiums pay for.
Should I talk to my kids before getting a reverse mortgage?
Strongly recommended. Many family disputes arise when adult children discover their inheritance has been consumed by a reverse mortgage balance they didn’t know about. Having an honest conversation about your finances, your needs, and the loan’s impact on the estate prevents ugly surprises. Some families decide to help the parent financially rather than lose the home’s equity to compounding interest. Explore other equity-tapping options first — use our HELOC calculator or refinance calculator to compare alternatives before committing to a reverse mortgage.