What a reverse mortgage is and how the money reaches you

A reverse mortgage is a loan against your home that you do not repay while you live there. The lender pays you — either as a lump sum, monthly payments, a line of credit you draw from, or some combination — and the loan balance grows over time. When you move, sell the home, or pass away, the loan is repaid from the home's sale proceeds. You keep the title and remain responsible for property taxes, insurance, and maintenance.

The most common type is a Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECMs have rules about how much you can borrow, who can take one out, and what happens if the loan balance exceeds the home's value when it comes due. Other reverse mortgages exist — proprietary loans from private lenders and single-purpose loans from some state and local programs — but they work differently and have different limits.

The amount you can borrow depends on your age, the home's value, current interest rates, and the type of reverse mortgage. Generally, the older you are and the more your home is worth, the more you can borrow. If you are 62 or older and own your home outright or have a small mortgage remaining, you may be able to take out a reverse mortgage.

Key Takeaways

  • A reverse mortgage lets you borrow against your home's value without making monthly payments, but the loan balance grows and must be repaid when you move, sell, or pass away.
  • You must be at least 62 years old, own your home, and live in it as your primary residence to take out an HECM reverse mortgage.
  • The amount you can borrow is determined by your age, home value, interest rates, and the lender's rules, and you will owe closing costs, insurance premiums, and interest that compound over time.
  • Before taking out a reverse mortgage, you must complete a counseling session with a HUD-approved counselor who will explain the costs, risks, and alternatives.
  • If you have a surviving spouse who is not on the loan, they may lose the right to stay in the home after you pass away, so this situation requires careful planning.

Who can take out a reverse mortgage and what the lender will check

To may have access to for an HECM, you must be at least 62 years old, own your home (or owe very little on it), and live in it as your primary residence. The home must be a single-family house, a condo in an FHA-approved building, a townhouse, or a manufactured home built after 1976. Mobile homes, cooperative apartments, and investment properties do not may have access to.

If you still have a mortgage, you will need to use some of the reverse mortgage proceeds to pay it off before you receive any money for yourself. The lender will order an appraisal to determine the home's value and will verify your ownership through a title search. They will also pull your credit report, though a low credit score does not automatically disqualify you — the lender is checking whether you have a history of not paying property taxes or homeowners insurance, which are conditions of keeping the loan.

You will need to show proof of homeowners insurance and, if applicable, flood insurance. The lender will verify that you are current on property taxes. If you are not, you may still be able to proceed, but the lender may set aside funds from your loan to cover back taxes before releasing money to you.

Costs you will pay: interest, insurance, and fees

A reverse mortgage is not free. You will pay an origination fee (typically 1 to 2 percent of the home's value or a flat amount, whichever is less), an appraisal fee (usually $300 to $500), a title search and insurance fee, and other closing costs similar to a forward mortgage. These costs vary by lender and state.

You will also pay an FHA mortgage insurance premium (MIP) — an upfront premium of 2 percent of the home's value (or the FHA lending limit, whichever is less) and an annual premium of 0.5 percent of the loan balance each year. This insurance protects the lender if the loan balance exceeds the home's value when it comes due. You do not write a check for these premiums; they are added to your loan balance, which means you are borrowing money to pay them.

You will also pay interest on the loan balance. Interest rates vary by lender and by the type of rate you choose — fixed or adjustable. The interest compounds over time, meaning interest accrues on top of previous interest. If you borrow $100,000 at 6 percent interest and do not make payments, after 10 years the balance will be roughly $179,000. The longer you keep the loan, the more you owe.

How much money you can borrow and when you receive it

The amount you can borrow is called the principal limit. It is calculated using your age, the home's appraised value, the current interest rate, and FHA rules. Generally, the older you are, the higher the principal limit. A 75-year-old can borrow more than a 65-year-old with the same home value.

The FHA sets a maximum loan amount each year — in 2024, the limit is $1,089,300 in most areas, though it varies by county. If your home is worth $500,000 and you are 72 years old, you might be able to borrow 50 to 60 percent of that value, depending on interest rates. The exact percentage changes as rates change.

You can receive the money in several ways: a single lump sum, monthly payments for a set period or for as long as you live in the home, a line of credit you draw from as needed, or a combination of these. If you choose a line of credit, you pay interest only on the amount you actually borrow, not on the full credit line. Many retirees choose a line of credit because it gives them flexibility and keeps the loan balance lower in the early years.

Required counseling and what happens before you close

Before you can close on an HECM, you must complete a counseling session with a HUD-approved housing counselor. This is a legal requirement, not optional. The counselor will review the costs of the reverse mortgage, explain how it works, discuss alternatives (such as downsizing, a home equity line of credit, or a forward mortgage), and answer your questions. The session usually takes 60 to 90 minutes and can be done in person, by phone, or online.

You will receive a certificate of counseling, which you must provide to the lender before closing. The counselor does not tell you whether to take out the reverse mortgage — that is your decision — but they do make sure you understand what you are signing up for. You can find a HUD-approved counselor by calling 1-800-569-4287 or visiting HUD's website.

After counseling, the lender will order the appraisal, run the title search, and verify your insurance and tax status. This process typically takes two to four weeks. Once everything is clear, you will sign the loan documents and close. The lender will then disburse the funds according to the payment plan you chose.

What you remain responsible for and what happens if you do not pay

Even though you are not making monthly payments on the loan itself, you remain responsible for property taxes, homeowners insurance, and home maintenance. If you do not pay property taxes or let your insurance lapse, the lender can declare the loan in default and demand repayment. This is one of the most common reasons reverse mortgages end early.

You must also keep the home in reasonable condition. The lender may require a home inspection and can demand repairs if the home is deteriorating. If you move out of the home for more than 12 consecutive months — for example, to live in a nursing home or with family — the loan becomes due and payable. Some lenders allow a grace period if you are in a hospital or temporary care facility, but this varies.

If you pass away, your heirs have the right to keep the home by paying off the reverse mortgage, or they can sell it and use the proceeds to repay the lender. If the home is worth less than the loan balance, the FHA insurance covers the difference and your heirs owe nothing. If the home is worth more, your heirs keep the difference.

Reverse mortgages and your spouse: what you need to know

If you are married, both spouses can be on the reverse mortgage loan. If only one spouse is on the loan and that spouse passes away, the surviving spouse may lose the right to stay in the home, depending on the loan terms and when the loan was taken out. This is a serious issue that requires careful planning.

If you are married and only one spouse is 62 or older, only that spouse can be the borrower. The younger spouse can be listed as a non-borrowing spouse, which gives them some protections, but these protections are limited and depend on the loan's terms. If you are in this situation, speak with a HUD-approved counselor and a lawyer before proceeding.

Some couples choose to wait until both spouses are 62 before taking out a reverse mortgage, so both can be borrowers. Others use the reverse mortgage proceeds to pay off a forward mortgage, which can simplify the situation. There is no one right answer, but the decision should be made with full understanding of what happens to the surviving spouse.

Alternatives to a reverse mortgage and when they might make more sense

A reverse mortgage is one way to tap your home's equity, but it is not the only way. A home equity line of credit (HELOC) or a home equity loan lets you borrow against your home and make monthly payments. These typically have lower interest rates and fees than a reverse mortgage, but they require you to have income to may have access to and to make payments. If you are on a fixed income and cannot afford monthly payments, a reverse mortgage may be a better fit.

Downsizing — selling your current home and buying a smaller, less expensive one — gives you cash without taking on debt. You keep the difference between what you sell for and what you pay for the new home. This works well if you want to reduce your housing costs and do not need to stay in your current home.

A sale-leaseback is an arrangement where you sell your home to an investor and lease it back. This is less common and carries risks, so it should only be considered with legal advice. Some retirees also explore dowry programs or shared equity arrangements where a third party invests in your home in exchange for a share of future appreciation.

Frequently Asked Questions

Can I lose my home if I take out a reverse mortgage?

You can lose your home if you do not pay property taxes, let your homeowners insurance lapse, or fail to maintain the home. The lender can also demand repayment if you move out for more than 12 months. If you cannot repay the loan, the home will be sold to cover it. However, if the home is worth less than the loan balance, the FHA insurance covers the shortfall and you (or your heirs) owe nothing.

What if I want to move or sell my home after taking out a reverse mortgage?

You can sell your home at any time. The sale proceeds will be used to repay the reverse mortgage loan, and you keep any remaining money. If you move to another home, the reverse mortgage must be repaid. If you move to a nursing home or assisted living facility temporarily, you may have a grace period, but if you move permanently, the loan is due.

Do I have to tell my family about a reverse mortgage?

You are not required to tell anyone, but it is a good idea to discuss it with your spouse and adult children. They need to understand that the loan will be repaid from your estate and that there may be less money left for them. If you have a surviving spouse who is not on the loan, telling them about the reverse mortgage is especially important so they understand what will happen after you pass away.

Can I take out a reverse mortgage if I have bad credit?

A low credit score does not automatically disqualify you. The lender is checking whether you have a history of not paying property taxes or homeowners insurance. If you have paid these on time, you may still be approved even if your credit score is low. Ask the lender what specific credit issues would disqualify you.

What happens to a reverse mortgage if I pass away?

Your heirs have the right to keep the home by paying off the reverse mortgage loan, or they can sell it and use the proceeds to repay the lender. If the home is worth less than the loan balance, the FHA insurance covers the difference and your heirs owe nothing. If the home is worth more, your heirs inherit the difference.