Introduction to Reverse Mortgages

A reverse mortgage provides a unique solution for homeowners looking to tap into their home equity without the need to sell or move. Unlike traditional mortgages, where you make regular payments to the lender, with a reverse mortgage, the lender makes payments to you, increasing the amount you owe over time. This can provide a valuable financial resource, helping you cover living expenses, medical bills, or even fund home improvements.

While a reverse mortgage can provide financial relief, make sure to understand potential drawbacks and how it works before making a decision. In this guide, we’ll walk you through everything you need to know about reverse mortgages, including how they work, the different types available, and whether it might be the right choice for your financial future.

What Is a Reverse Mortgage?

With a reverse mortgage, homeowners, usually aged 62 and older, can convert the equity on their home into cash. Unlike a traditional mortgage, the amount the homeowner owes to the lender goes up, not down, over time. Instead of making monthly payments to the lender, the borrower repays the loan when they move, sell the home, or pass away.

Why Consider a Reverse Mortgage?

If you’re worried about paying your bills in your retirement years, a reverse mortgage could make sense for you. A reverse mortgage provides an option to supplement your retirement income, cover medical expenses, or to fund home improvements without digging into savings. That said, a reverse mortgage can come with some drawbacks, so make sure to understand the fine print before taking out a loan.

How Reverse Mortgages Work

A reverse mortgage has specific eligibility requirements, and not everyone can qualify. Typically, you’ll need to meet the following criteria:

• Must be at least 62 years of age (55+ in some states)
• The property must be your primary residence, not a second residence or vacation home
• Must own the home outright or have a small remaining mortgage balance
• Must undergo a financial assessment to make sure you meet certain requirements
• The property must meet required standards
• Cannot owe federal debt, such as student loans or tax debt
• According to the U.S. Department of Housing and Urban Development (HUD), you must attend a counseling session for Home Equity Conversion Mortgage (HECM), a type of reverse mortgage insured by the Federal Housing Administration (FHA)

Reverse Mortgage Payment Options

Borrowers have six payment options when it comes to a reverse mortgage:

Option 1: Tenure Plan

With a tenure payment plan, you receive equal monthly payments. The amount paid each month is calculated assuming that you’ll live to 100. This type of payment option makes sense for anyone seeking a stable monthly income that plans to stay in their residence long-term. It doesn’t suit anyone looking for a large sum of money upfront.

A tenure payment plan comes with an adjustable interest rate. This means your rate isn’t fixed—it changes each year based on an index plus a margin determined by your lender. You’ll find these details clearly spelled out in your mortgage agreement. Even if the market fluctuates, your rate won’t jump by more than two percentage points in a single year. This cap adds a layer of predictability to an otherwise unpredictable setup.

Option 2: Term Plan

With a term payment plan, you receive equal monthly payments for a set period of time of your choice, such as 10 years. Choosing a term plan means higher monthly payouts and more money upfront compared to a tenure payment plan.

This option doesn’t guarantee lifelong income unless you pass away before the end of the loan term. If you outlive the payouts, you could find yourself short on funds. Plus, there’s the risk of depleting your home equity too early, leaving you without a financial safety net later on. A term plan also comes with an adjustable interest rate that changes each year.

Option 3: Line of Credit Plan

A line of credit payment plan gives open access to money as needed. This type of payment offers the flexibility to withdraw the money you’d like as long as your balance remains under the principal limit.

Unused funds accrue interest based on the same rate that you pay on the amount borrowed. Plus, you only pay interest on the money that you actually borrow. That said, you could easily run out of money if you withdraw too much too quickly. A line of credit plan also comes with an adjustable interest rate that fluctuates year to year.

Option 4: Modified Tenure Plan

With a modified tenure plan, you receive fixed monthly payments along with access to a line of credit for as long as your home remains your principal residence. You’ll receive less money each month compared to a tenure plan, and your line of credit will also be lower than a line of credit plan.

A modified tenure plan gives you the flexibility to choose your monthly payments and line of credit amount. In this way, you can meet your financial needs without borrowing more than you need. A modified tenure plan also comes with an adjustable interest rate that fluctuates year to year.

Option 5: Modified Term Plan

With a modified term plan, you receive fixed monthly payments for a predetermined amount of time plus access to a line of credit for as your home remains your principal residence. A modified term plan also comes with an adjustable interest rate that fluctuates year to year.

A modified term plan gives you the flexibility to choose the amount you receive each month and for how long. You can also choose the size of your line of credit. Plus, you can receive higher monthly payments compared to a modified tenure plan. However, this option doesn’t make sense for anyone in need of a lump sum of money upfront.

Option 6: Lump Sum Payment at Closing

If you need a large amount of cash right away, a lump sum payment could be your best bet. With this option, you’ll receive the full amount as soon as your reverse mortgage closes. It’s ideal for tackling major expenses, like paying off a large mortgage balance or handling significant financial needs.

Once you receive the money, interest starts accruing on the loan amount as well as on monthly mortgage insurance premiums and any financed closing costs. This continues until the loan is due. Unlike other payment plans, a lump sum option comes with a fixed interest rate. That means your rate won’t change over time, giving you some stability. Just be mindful of how quickly interest can add up.

When Do You Need to Repay Your Reverse Mortgage Loan?

You’ll need to repay your reverse mortgage loan when you sell your home, change your primary residence, or if you pass away. In some cases, you may need to pay back the loan sooner if you fail to pay your property taxes or homeowners insurance, or do not keep the home in good repair.

Types of Reverse Mortgages

Looking for a reverse mortgage? There are three main types you should know about, each designed for specific needs. Whether you're looking for flexibility, higher borrowing limits, or a single-purpose option, understanding the differences between each can help you make an informed decision that makes sense for your situation.

Home Equity Conversion Mortgages (HECMs)

• Federally insured reverse mortgages for homeowners 62+
• Repayment occurs upon sale, moving, or death
• Backed by the FHA for added borrower security
• Loan size depends on age, interest rates, and home value.

Most reverse mortgages you’ll find today are Home Equity Conversion Mortgages (HECMs). Available to homeowners aged 62 and over, HECMs allow you to convert your home equity into cash or credit, with repayment deferred until you sell, move, or pass away. Backed by the Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD), HECMs represent the most common option and come with the security of federal insurance.

Loan amounts depend on the age of the borrower(s), interest rates, and the home value, with higher limits benefiting those with high-value properties. In 2024, the FHA increased the maximum claim amount for HECMs to $1,149,825, up from $1,089,300 in 2023.

Proprietary Reverse Mortgages

• Private, not federally insured.
• Higher payouts than HECMs, no FHA-imposed equity limits
• No upfront FHA insurance fees but higher interest rates
• Suitable for high-value homes; fewer borrower protections

A proprietary reverse mortgage is a private loan that allows seniors aged 62 and older to convert home equity into cash without FHA limits. Unlike government-backed HECMs, these loans offer higher payouts but come with higher interest rates and fewer borrower protections.

The absence of FHA insurance fees can reduce upfront costs. This option suits high-value homeowners seeking maximum equity but carries risks due to limited safeguards. They are non-taxable, and the funds can be used for any purpose.

Single-Purpose Reverse Mortgages

• Offered by state or nonprofit agencies
• Restricted to specific uses like home repairs or taxes
• Lower costs and interest rates than other reverse mortgage types
• Limited availability and restricted spending.

A single-purpose reverse mortgage allows homeowners aged 62+ to access their home equity for specific, lender-approved expenses like property taxes or home maintenance. Offered by some state or local governments and nonprofits, these loans are strictly limited to specific uses that the lender approves. They’re often available only to homeowners with low to moderate incomes and might not be an option in every area. Unlike HECMs, they aren’t federally insured.

Costs of Reverse Mortgages

Before moving forward with the lending process, make sure to fully understand the fees and other costs associated with each type of reverse mortgage, such as:

Upfront Costs and Fees

• Origination fee
• Real estate closing costs

You’ll pay these costs at the beginning of your loan. These can include an origination fee paid to the lender, typically $6,000 or less. You may also pay real estate closing costs for an appraisal, title search, surveys, inspections, recording fees, mortgage taxes, and credit checks. In some cases, you may pay an initial mortgage premium to the Federal Housing Administration.

Ongoing Costs

• Interest (fixed or adjustable rates)
• Servicing fees
• Annual insurance premiums
• Property charges

Expect to pay for ongoing costs throughout the duration of the loan. These costs include the interest accrued on your loan (fixed or adjustable rates depending on the type of reverse mortgage). Typically, a reverse mortgage has adjustable interest rates that fluctuate annually based on an index plus a margin determined by your lender. If you take out a lump sum payment at closing, you’ll pay a fixed interest rate that remains the same throughout the duration of the loan.

You may need to pay your lender servicing fees to cover costs for sending account statements or processing loan proceeds. Reverse mortgages also come with annual insurance premiums of 0.5% of the outstanding mortgage balance.

In addition, you must continue paying for property charges for your home, such as homeowners insurance, property taxes, and maintenance. You may need to repay the loan if you fail to pay these or face foreclosure.

Need some advice on how to calculate a reverse mortgage amount? Many lenders have convenient, free tools online for you to instantly calculate reverse mortgage costs. You can use a reverse mortgage calculator to consider all costs before applying.

For example, an HECM calculator, you’ll need to provide some information such as your age, zip code, home value, and mortgage balance. Then you’ll get an idea if you qualify and how much you can borrow.

How Much Can You Borrow?

So, how is reverse mortgage calculated? Lenders look at a few different factors to determine your loan amount including:

• Your home’s appraised value or the current lending limit (whichever is less)
• The age of the youngest borrower
• Interest rates at the time of the loan application

The amount of money available through a reverse mortgage depends on the youngest borrower’s age, your home value, equity, interest rates, and loan type. Older borrowers generally qualify for more funds, as do homes with higher equity and lower existing debt.

You can receive funds as a lump sum, monthly payments, a line of credit, or a mix, with distribution choices affecting the total amount. FHA lending limits set a baseline for maximum loan amounts (In 2024, the Federal Housing Administration (FHA) increased the maximum claim to $1,149,825). Proprietary jumbo reverse mortgages can exceed these limits, potentially as high as $4 million.

Advantages and Disadvantages of Reverse Mortgages

So, does a reverse mortgage make sense for you? Reverse mortgages can be a lifesaver for retirees needing extra cash, but they’re not without their drawbacks. It really all depends on your current financial situation and the type of reverse mortgage you intend to use. Consider the following advantages and disadvantages to help make the right decision:

Advantages of a Reverse Mortgage

• Access home equity without selling the property
• No monthly payments required
• Funds are typically not taxable
• Never owe more than the home’s value with HECMs

A reverse mortgage allows you to tap into your home’s equity without selling it. That means staying in the house you love while unlocking funds to boost your retirement lifestyle. Even better, there are no monthly payments—you repay the loan only when you move out or sell.

Another plus? The money you receive is usually tax-free, so you get to keep every penny. If you opt for a federally insured Home Equity Conversion Mortgage (HECM), there’s added peace of mind: you or anyone that inherits the property will never owe more than the home’s market value, no matter what.

Disadvantages of a Reverse Mortgage

• Loan balance grows over time
• Home may need to be sold to repay the loan
• Fees and interest can be substantial
• Risk of foreclosure if property expenses aren’t maintained

Reverse mortgages aren’t free money. Over time, the loan balance grows as interest accrues. While you’re not paying monthly, the amount you owe keeps increasing, which could shrink the inheritance you leave behind to your heirs.

To repay the loan, selling the house might be unavoidable. And don’t forget the costs like fees and interest rates. If you fail to keep up with property taxes, insurance, or basic upkeep, you may even risk foreclosure.

So, is a reverse mortgage right for you? A reverse mortgage can be a game-changer for the right person, but it’s not for everyone. Understand the risks, crunch the numbers, and weigh your options carefully before deciding.

Reverse Mortgage Alternatives

If you’ve built up equity in your home, a reverse mortgage isn’t your only way to tap into it. Consider the following different options to find the right choice for your situation:

Home Equity Loan

A home equity loan lets you borrow against your home’s value, using your equity as collateral. Think of it as a one-time lump sum you repay in fixed monthly installments. The interest rate is locked in, so your payments stay the same until the loan is paid off.

Home Equity Line of Credit (HELOC)

A HELOC gives homeowners the option of a home equity line of credit. After approval, you can borrow money multiple times through a revolving line of credit with variable interest rates, similar to a credit card. To pay off the money, you can do so incrementally in smaller payments or all at once.

Cash-Out Refinance

With cash-out refinancing, you replace your existing mortgage with a new one—usually for a higher amount. The difference? That’s your cash to use however you like. This option can help if you’re looking to renegotiate loan terms or consolidate debts while pulling out equity.

Home Equity Investments

Home equity investments are a newer alternative. Instead of a loan, you get upfront cash in exchange for a share in your home’s future value. No monthly payments here—the investment is settled when you sell your home or buy out the investor later.

Each option has its benefits, whether you value fixed payments, flexibility, or innovative solutions. The right choice depends on your financial situation, goals, and comfort with risk. Take your time, explore your options, and find what works best for you.

Choosing the Right Reverse Mortgage Lender

Confident a reverse mortgage is your best choice? It’s easy to get started online. Many lenders let you apply directly through their websites, offering tools to calculate reverse mortgages and compare options. This makes it simple to find the right loan for your financial goals.

Some online lending platforms let you compare interest rates and fees from multiple lenders instantly—side by side, no commitment necessary. Use these tools to find the most competitive offer, and don’t settle for the first deal you see. You can also read customer reviews to find out the right reverse mortgage companies for you.

Before diving in, get clear on your financial priorities. How much do you need? How much is your home worth? How much equity do you have on your property? Having these answers upfront helps you narrow down your options and focus on lenders that fit your situation.

Consider which type of reverse mortgage you intend to take out. Some lenders focus exclusively on specific reverse mortgages, while others may offer a mix of both. Take time to compare products and pick the one that aligns with your financial goals and budget.