What is a reverse mortgage, and how does it work?

A reverse mortgage is a unique home loan available to seniors 62 or older with significant equity. Instead of making payments as you would with a traditional mortgage, you receive payments based on the equity in your home. You can use a reverse mortgage to supplement retirement income, pay off debt or fund large purchases.

However, reverse mortgages can be complicated, risky and expensive. Over time, your home equity decreases and your loan amount increases, meaning your estate may have to sell the home to repay the loan upon your death. And unfortunately, the reverse mortgage industry is rife with scams.

We’ll help you understand the benefits and drawbacks of a reverse mortgage and show you how to avoid bad actors.

I’ve heard about reverse mortgages. But how do they work?

A reverse mortgage is aptly named — it works like a mortgage in reverse. Instead of repaying your loan in monthly installments, the lender makes payments to you, adding monthly interest and fees to the total amount owed. That means the loan balance increases rather than decreases over time, as it does with a traditional mortgage. The longer you keep the reverse mortgage, the more you owe.

To qualify, you must own your home outright or be able to pay off your primary mortgage at closing. Because the money is a loan, it isn’t considered taxable income.

One of the most popular forms of reverse mortgages is a home equity conversion mortgage (HECM), a type of FHA loan backed by the Federal Housing Administration. Funds are released in monthly installments (or as a credit line or lump sum payment) to the homeowner — over time, the amount owed increases as the balance, interest and fees grow. The loan is repaid in full when the borrower dies, sells the home or moves away permanently.

Depending on the type of reverse mortgage you choose, you may be able to select how you receive the money. Disbursement options include:

• A line of credit: Use the amount you need and reserve the rest of the credit line for future use. You only pay interest on the amount of credit you’ve used.
• Monthly payout: Choose monthly payments for a specific number of years or fixed payments for as long as you have the loan. You pay interest only on the money you’ve drawn.
• Lump sum: You receive all the money at the start of the mortgage, which means that interest accrues on the entire amount for as long as you have the loan.
• A combination of payouts: You may be able to combine a line of credit with set monthly payments.

While you have the reverse mortgage, you must continue paying property taxes and homeowners insurance premiums and keep the home in good condition. The house is the collateral for the mortgage, so the lender wants to be sure it maintains its value.

A reverse mortgage isn’t repaid until the borrower dies, permanently moves out of the home or sells the property. If the balance owed on a HECM is higher than the appraised fair market value of the house, the mortgage insurance you’re required to buy will cover the difference.

How much can I borrow with a reverse mortgage?

The amount you can borrow depends on multiple factors. Lenders calculate your principal limit (the maximum amount you can access) by looking at the following:

• Your age (and the age of your co-borrower or eligible non-borrowing spouse)
• Current mortgage rates
• Appraised home value
• Outstanding mortgage balance (if any)
• Disbursement option
• Closing costs and loan fees (if you finance them)
• FHA reverse mortgage limits (if getting a HECM)

Generally, the older you are, the more your home is worth and the lower the interest rate, the higher the principal limit you’ll qualify for.

The 2024 HECM limit is $1,149,825. If your home is worth more than the FHA limit, you can borrow a higher amount with a jumbo reverse mortgage (more below).

How much do reverse mortgages cost?

Like any mortgage, a reverse mortgage comes with a variety of costs. You must pay closing costs and some fees upfront, while other fees are ongoing. A government-backed HECM, the most common type of reverse mortgage, requires the following fees:

Type of expense	Detail	Cost
Origination fee	Paid upfront to the lender to cover the cost of processing the loan	Based on home value; capped at $6,000
Closing costs	Appraisal, title insurance, surveys, credit check, etc.	Varies
Servicing fee	Added to the loan balance each month for servicing the loan and managing tasks like tax payments	Up to $30/month for fixed or annually adjusting rate; up to $35/month for monthly adjusting interest rate
Mortgage insurance	Required to protect the lender if your home is worth less than you owe when your reverse mortgage ends	2% of the maximum claim amount upfront, 0.5% of outstanding mortgage balance annually
Counseling	You must meet with a counselor approved by the Department of Housing and Urban Development (HUD) before taking out a reverse mortgage	About $125
Interest	Rate may be fixed or may adjust annually or monthly	Monthly interest amount is based on loan balance, which goes up each month

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3 types of reverse mortgages

1. Home equity conversion mortgage (HECM)

Best for: Seniors who want access to monthly income or a line of credit

HECMs are the most common reverse mortgage type and are federally insured by HUD. You can use the money for any purpose. While there typically aren’t income requirements on HECM loans, your lender will have to evaluate your finances to determine whether you’re able to maintain the condition of the home and repay the loan if needed.

2. Single-purpose reverse mortgage

Best for: Homeowners who need money for a specific purpose

Single-purpose reverse mortgages are available from some nonprofits and state or local government agencies for moderate-income seniors who need money for a specific purpose, such as paying property taxes or making home repairs. These are generally smaller loans and are less expensive than other reverse mortgages.

3. Jumbo reverse mortgage

Best for: Seniors who own expensive homes

These are also known as proprietary reverse mortgages because they’re offered by private lenders. They typically have higher interest rates, but you may be able to borrow more money if you have a high-value home.

Pros and cons of reverse mortgages

Pros	Cons
Allow seniors to remain in their home Supplement retirement income or repay debt No income requirements Funds aren’t considered taxable income No possibility of owing more than the home is worth (if the loan has a “non-recourse” clause)	Reduced home equity Closing costs and fees can be high Borrower must live in the home the majority of the year, as a primary residence Can limit future options Slow approval process

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The benefit of a reverse mortgage is that “seniors can remain in their home when they have a lot of equity and not a lot of other resources or liquid assets to pay for living costs,” said Melissa Cohn, regional vice president at William Raveis Mortgage. Homeowners don’t have to meet income requirements for a reverse mortgage. Loan funds can supplement your retirement savings, pay for health insurance or in-home care, repay debt or fund a major purchase.

However, she also noted that the fees associated with a reverse mortgage can be expensive. Because you aren’t making mortgage payments, the amount you owe increases through the life of the loan. The process to get a reverse mortgage can be slower than getting a conventional mortgage, taking 60 to 90 days for approval.

The biggest downside of a reverse mortgage is that it limits your options down the road — if you want to sell the home to downsize or move into assisted living, you’ll have to repay the debt from the proceeds. Or, if you live in the home until your death, your estate will likely have to sell the property to repay the mortgage, reducing any inheritance your heirs receive.

Unfortunately, fraudsters use reverse mortgage scams to steal seniors’ identities or equity, so be sure to work with a reputable lender and don’t be pressured into signing any agreements you don’t understand.

How can I qualify for a reverse mortgage?

For single-purpose and proprietary reverse mortgages, the lender sets its own eligibility requirements. To qualify for a HECM, you must:

• Be at least 62 years old
• Live in the property most of the time
• Own the home outright or have paid off a “substantial amount” of the existing mortgage
• Continue to pay property taxes, homeowners insurance, HOA fees and home repairs
• Attend a counseling session with an approved housing counselor
• Apply with an FHA-approved lender
• Not owe any federal debt, such as unpaid taxes

How does repayment on a reverse mortgage work?

You must repay the mortgage when the home is no longer your principal residence or you sell it, or your heirs will be responsible for repaying the loan upon your death.

Typically, heirs sell the property upon the borrower’s death and use the money to repay the loan. If the amount owed on the loan is more than the property is worth, mortgage insurance covers the difference, as long as the home is sold for the appraised fair market value.

How to prevent a reverse mortgage foreclosure

With a conventional mortgage, you must pay the lender as agreed to prevent a mortgage foreclosure. To avoid a reverse mortgage foreclosure, you must meet other obligations, such as paying the property taxes, paying for homeowner’s insurance and keeping the home in good condition.

You can also lose the home if it’s no longer your primary residence. If you live somewhere else for more than 12 consecutive months and no co-borrower is living in the home, you’re required to pay back the loan.

Reverse mortgage scams: What to watch out for

Reverse mortgages are complex, making them a target for scammers looking to take advantage of seniors who might be more vulnerable. If you’re considering a reverse mortgage, familiarize yourself with common scams and high-pressure sales tactics.

• Home improvement schemes: A common scam involves contractors approaching you about expensive home repairs (especially after a natural disaster) and urging you to get a reverse mortgage to cover the cost.
• Pressure to buy financial products: Some reverse mortgage salespeople pressure you to invest your loan proceeds by purchasing an annuity, long-term care insurance or a “can’t miss” investment. Be advised: Reverse mortgage lenders aren’t allowed to sell you other financial products.
• Reverse mortgages for veterans: Another tactic targets veterans by promising special deals or mentioning VA approval. However, the Department of Veterans Affairs (VA) doesn’t offer reverse mortgages.
• Sign a power of attorney: A scammer may ask you to sign a power of attorney document, which gives them access to your loan payout.

How to protect yourself from reverse mortgage scams

• Don’t respond to ads or unsolicited reverse mortgage calls. Many scammers target older homeowners through churches, community organizations, investment seminars, mailers and TV ads. If you’re interested in a reverse mortgage, initiate the process directly with a reputable lender.
• Be cautious when providing your personal information. Only give out your Social Security number or other identifying information if you’re sure you’re working with a reputable lender. (A housing counselor can help you find a legitimate lender.)
• Shop around for your loan with multiple lenders. If a lender insists you only speak to them, that’s a red flag. You can ensure you’re working with a trustworthy lender by checking their listing with the Better Business Bureau.
• Slow down. If the process seems too rushed or you feel pressured to move forward, walk away. Avoid signing anything you don’t understand.

If you encounter fraud when shopping for a reverse mortgage, report it to your state attorney general, the Federal Trade Commission or the HUD Office of Inspector General (for HECM-related scams).

Alternatives to a reverse mortgage

If a reverse mortgage doesn’t meet your financial needs, you might consider other ways to tap your home equity. If you can’t qualify for a conventional loan because of credit or income issues, using a cosigner to strengthen your application may be a better option than a reverse mortgage.

	Basics	Eligibility	Best for
Home equity loan	A lump-sum loan repaid over 5 to 30 years	Credit scores of 620 or higher 85% LTV	Paying for home repairs, repaying debt or covering major expenses
Home equity line of credit (HELOC)	A credit line that allows flexible borrowing as needed	Credit scores of 620 or higher 80% to 90% LTV	Accessing funds as needed
Cash-out refinance	Refinance your home for more than the current balance, pocketing the difference	Credit scores of 640 or higher 80% LTV	Homeowners who can qualify for a lower rate on their mortgage
Shared equity agreement	An investor provides upfront money in exchange for a share of the home and shares the profits when you sell	Must be willing to share equity with a third party	Homeowners with bad credit who can’t qualify for traditional financing
Personal loan	An unsecured loan that relies on your (cosigner’s) creditworthiness and typically has higher interest rates (than the above options)	Good credit scores (mid-600s or above) Low amounts of debt	Seniors who don’t want to touch their home equity

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Refresher: What is LTV? Your loan-to-value ratio is the amount of debt secured by your home compared to its appraised value. The LTV is the inverse of your equity — if you have 90% equity in your home, your LTV would be 10%. Many lenders for home equity loans or lines of credit allow an LTV as high as 80% or 90%.

Let’s say that your home is worth $300,000, you have a $50,000 mortgage balance and you want to borrow a $25,000 home equity loan. That means your LTV ratio would be 25%:

$50,000 mortgage balance + $25,000 home equity loan = $75,000

$75,000 / $300,000 = 0.25

6 steps to get a reverse mortgage

1. Confirm your eligibility. Make sure you meet the general borrower requirements covered above, including the amount of equity, age and lack of federal debt.
2. Meet with a housing counselor. This step is required for most reverse mortgages. If you’re getting a HECM, you’ll need to meet with a HUD-approved counselor who will answer your questions, explain the options and estimate your annual costs.
3. Compare lenders. Shop around with several FHA-approved lenders to compare APRs, closing costs and other fees. For non-HECM reverse mortgages, ask your HUD-approved housing counselor about reputable lenders.
4. Apply for the loan. After selecting a lender, you’ll apply for the mortgage and determine how you want the funds to be disbursed. You must supply documentation about your home (and any liens against it), proof of homeowners insurance and other financial information.
5. Close on the loan. Once the underwriting process is complete, you’ll close on the loan and receive your funds.
6. Know your rights. With most reverse mortgages, you have a right of “rescission,” which gives you three business days after closing to change your mind for any reason. You’ll need to notify your lender in writing and follow additional requirements. Your lender should supply you with information about your right to cancel.

Additional reporting by Alaya Linton

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