What Is a Reverse Mortgage?
A reverse mortgage allows you to convert part of your home’s equity to cash for everyday living expenses and unexpected bills.
However, reverse mortgages aren’t a one-size-fits-all solution for everyone — only homeowners ages 62 or older can qualify. It’s important to first understand how they work to help you decide whether a reverse mortgage is right for you.
How does a reverse mortgage work?
A reverse mortgage is designed to help older homeowners who want to age in place and supplement their income by tapping the equity in their home. Unlike a traditional mortgage, you don’t make monthly payments. Instead, the reverse mortgage loan is usually repaid when you move out of the home or when you die.
You can choose to receive your reverse mortgage funds in a few different ways:
- A lump sum (which comes with a fixed interest rate)
- As monthly payments
- Through a line of credit
Learn more about how much home equity is needed for a reverse mortgage.How your reverse mortgage loan amount is calculated
Your loan amount with a reverse mortgage is called the “principal limit” and is determined by:
→ Your age
→ The age of the youngest co-borrower or eligible nonborrowing spouse
→ Interest rate
→ Your home’s value
Watch out for reverse mortgage scams
Types of reverse mortgages
- Home equity conversion mortgage (HECM): A HECM is the most common type of reverse mortgage and is insured through the Federal Housing Administration (FHA). HECMs are only available through FHA-approved lenders.
- Proprietary reverse mortgage: These types of reverse mortgages are offered by private mortgage lenders and aren’t federally insured. Since they aren’t restricted by HECM loan limits, many of their borrowers have higher home values.
- Single-purpose reverse mortgage: Some states, local governments and nonprofits may offer single-purpose reverse mortgages. These loans are reserved for a specific purpose, such as renovating your home to be wheelchair accessible. Ask your local Area Agency on Aging (AAA) or senior resource center about nearby programs.
Reverse mortgage eligibility requirements
Reverse mortgages have strict eligibility criteria in place to protect both borrowers and lenders.
To qualify for a home equity conversion mortgage, you’ll need to meet the following requirements:
→ You must be age 62 or older
→ The home must be your principal residence
→ You must either have a low mortgage balance or own your home outright
→ You can’t owe any federal debt, including income taxes and student loans
→ You must have enough money to afford your property taxes, homeowners insurance and maintenance expenses
→ Your home must be in good shape
→ You must meet with a reverse mortgage counselor approved through the U.S. Department of Housing and Urban Development (HUD)
The requirements for proprietary and single-purpose reverse mortgages are similar. Since they are less regulated than HECMs, however, terms and requirements can vary between lenders. It’s important to compare a few different reverse mortgage companies and understand the details of any reverse mortgage you’re considering.
You should consult an advisor about if a reverse mortgage is a good idea
Reverse mortgage costs
Reverse mortgages generally cost more than other types of home loans, though the exact costs vary depending on the loan program and lender.
Reverse mortgage costs can be split up into two main categories: upfront costs and ongoing costs. You can typically pay these expenses in cash or from your loan proceeds.
Here are some of the most common reverse mortgage expenses:
| Upfront costs | Ongoing costs |
|---|---|
| Origination fees | Interest charges |
| Reverse mortgage counseling through a HUD-approved agency (only for HECM loans) | Property taxes |
| Closing costs: Title search, appraisal and inspection fees | Homeowners association fees (if applicable) |
| Initial mortgage insurance premium (only for HECM loans) | Annual mortgage insurance premium (only for HECM loans) and homeowners insurance |
Reverse mortgage example
Let’s say you live in a single-family home as your primary residence. Your home’s value is $400,000, and your mortgage balance is $50,000, which means you have $350,000 in equity. In this case, you may be eligible to receive up to $126,360 as a lump sum payment.
Ready to estimate your loan amount? Crunch the numbers with a reverse mortgage calculator.Reverse mortgage pros and cons
| Pros | Cons |
|---|---|
| Your reverse mortgage proceeds aren't considered taxable income by the IRS | You'll typically pay more to borrow a reverse mortgage compared to other home loans |
| You can stay in your home longer | Your loan balance will increase over time, decreasing your home equity |
| You won’t have a monthly mortgage payment | Your heirs may receive a smaller inheritance since the loan reduces your home equity |
| You have cash you can use for living expenses, surprise bills, paying off debt or other financial concerns | You must repay the loan in full if you move out of your home |
| You don’t have to meet debt-to-income (DTI) ratio requirements to qualify | You can't deduct mortgage interest until you pay off the loan in full |
Read more in our full rundown of reverse mortgage pros and cons.Does a reverse mortgage make sense for you?
A reverse mortgage is an option for older homeowners with significant equity in their homes who need to supplement their retirement income. Here are some examples of when a reverse mortgage may be a good idea, versus when you may want to think twice.
| A reverse mortgage may be a good idea if: | A reverse mortgage may not be a good idea if: |
|---|---|
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Reverse mortgage alternatives
Cash-out refinance
With a cash-out refinance, you’ll replace your current mortgage with a new one that has a larger amount, pocketing the difference in cash. A cash-out refinance may make sense if you need money for a large purchase, like a major renovation or debt consolidation. Unlike a reverse mortgage, you’ll have a monthly mortgage payment.
Use a cash-out refinance calculator to estimate how much money you could receive.
Home equity loan
A home equity loan allows you to borrow against your home equity. The loan amount depends on your home’s value and your remaining mortgage balance, and it’s paid in a lump sum. Home equity loan rates are usually fixed, and loan repayment terms range from five to 30 years.
Read our comparison of how to choose between a reverse mortgage, a home equity loan, and a HELOC.Home equity line of credit
A home equity line of credit (HELOC) allows you to access the equity in your home on an as-needed basis. HELOCs function similarly to credit cards — you can draw from the credit line when you need it, pay it off and then borrow again. HELOCs are best for home improvements and repairs or other large expenses.
Browse current HELOC rates.Frequently asked questions
You may not qualify for a reverse mortgage if you’re under the age of 62, don’t have enough equity in your home or can’t afford the ongoing costs of homeownership, including property taxes, insurance and repairs.
The amount of money you’ll receive from a reverse mortgage depends on a few factors, including your age, your home’s value and the interest rate.
Reverse mortgages can have fixed or variable interest rates, depending on how you choose to receive the money. If you select a lump-sum payout, you’ll have a fixed interest rate, while the credit line and monthly payout options offer adjustable rates.
Yes, you still own your house if you have a reverse mortgage. Similar to a traditional mortgage, the title to your house remains in your name.
Often, the easiest way to get out of a reverse mortgage is to sell the home and pay off the mortgage with the sale proceeds. With most reverse mortgage loans, you can cancel the deal within three days of closing on the loan — this is known as your “right of rescission.”
It’s a good idea to compare loan types, fees and rates from several different lenders to find the best loan for your needs at the lowest rate and costs. You can search for FHA-approved reverse mortgage lenders on the HUD website.