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Part of the Series Guide to Reverse MortgagesReverse Mortgage Basics
CURRENT ARTICLEReverse Mortgage Types
A reverse mortgage is a loan that allows eligible homeowners age 62 or older to borrow money against the equity in their home and receive the proceeds as a lump sum, a fixed monthly payment, or a line of credit. Unlike a regular mortgage—the type used to buy a home—a reverse mortgage doesn't require the homeowner to make any loan payments during their lifetime. Instead, the loan becomes due when the borrower dies, moves out permanently, or sells the home.
Reverse mortgages can provide much-needed cash for older people whose net worth is mostly tied up in their home equity—the home's market value minus any outstanding home loans. But these loans can also be costly and complex, which makes them more suitable for some homeowners than others.
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments (we'll explain the choices in the next section) and also keeps the title to the home. Over the loan's life, the homeowner's debt increases and their home equity decreases.
As with a regular mortgage, the home serves as collateral for a reverse mortgage. When the homeowner moves out or dies, the lender can sell the home to recoup the reverse mortgage's principal and interest. Any sale proceeds beyond what the lender is owed go to the homeowner (if still living) or the homeowner's estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage themselves so that they can keep the home.
Federal rules require lenders to structure the transaction so that the loan amount won't exceed the home's value. Even if it does, such as through a drop in the home's market value or if the borrower lives longer than expected, the borrower or borrower's estate won't be held responsible for paying the lender the difference, thanks to the program's mortgage insurance.
The Consumer Financial Protection Bureau (CFPB) warns homeowners against reverse mortgage scams, which the bureau says "often target older adults through community organizations; investment seminars; and television, radio, billboard, and mailer advertisements." For more on these scams and how to avoid them, see below.
There are three types of reverse mortgages. The most common by far is the government-sponsored home equity conversion mortgage (HECM). HECMs represent almost all of the reverse mortgages that lenders offer on homes whose values fall below the conforming loan limit (set annually by the Federal Housing Finance Agency and currently $1,149,825). Because they are the type you're most likely to obtain, they are the primary focus of this article. Also called a Federal Housing Administration (FHA) reverse mortgage, this type of loan is available only through an FHA-approved lender.
If your home is worth more than the limit, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage, which some lenders offer.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
It's also possible for borrowers 62 and up to use a reverse mortgage called a "HECM for purchase" to buy a different home from the one in which they currently live.
The number of HECM reverse mortgages issued in FY 2023, according to the National Reverse Mortgage Lenders Association.
Reverse mortgages can be expensive, and they aren't right for everyone. However they can sometimes be a solution for homeowners who:
The government has a number of rules regarding eligibility for reverse mortgages and the borrower's responsibilities once they have obtained one.
If you own a house, a condominium, a townhouse, or a manufactured home built on or after June 15, 1976, you may be eligible for a reverse mortgage. Under FHA rules, cooperative housing owners cannot obtain reverse mortgages since they don't technically own the property they live in: they own shares of a corporation instead. In New York, where co-ops are common, state law further prohibits reverse mortgages for co-ops, allowing them only for one- to four-family residences and condos.
While reverse mortgages don't have income or credit score requirements, they still have rules about who qualifies. You must be at least 62 years old, and you must either own your home free and clear or have a substantial amount of equity (at least 50%) in it. Borrowers must also pay an origination fee, an upfront mortgage insurance premium, other standard closing costs, ongoing mortgage insurance premiums (MIPs), and sometimes loan servicing fees. Most of the upfront closing costs can be rolled into the loan, but that still leaves the ongoing costs, which can also include homeowners insurance premiums and property taxes. The federal government limits how much lenders can charge for many of these items.
The U.S. Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session. This counseling session, which usually costs around $125, should take at least 90 minutes and cover the pros and cons of taking out a reverse mortgage given your financial and other circumstances. It should explain how a reverse mortgage could affect your eligibility for Medicaid and Supplemental Security Income (SSI). The counselor should also go over the different ways that you can receive the proceeds.
Your responsibilities under the reverse mortgage rules are to stay current on property taxes and homeowners insurance (and homeowners association fees, if any) and keep the home in good repair. And if you stop living there for longer than one year—even if it's because you're living in a long-term care facility for medical reasons—then you'll have to repay the loan, which is usually accomplished by selling the house.
Despite recent reforms, there are still situations in which a widow or widower could lose the home upon their spouse's death.
As mentioned, reverse mortgage borrowers face an assortment of fees. Some are charged at the outset, such as origination fees, an initial mortgage insurance premium, and other closing costs. In addition, there are ongoing expenses, such as annual mortgage insurance premiums (MIPs) and sometimes loan servicing fees. Interest on the loan will accumulate, as well, while the homeowner's equity will be whittled away.
Upfront mortgage insurance premiums are fixed at 2% of the home's appraised value, so for every $100,000 in value, the borrower pays $2,000. On a $300,000 house, for example, the fee would be $6,000. After that, the homeowner will have to pay an annual insurance premium equal to 0.5% of the outstanding loan balance.
Note that mortgage insurance premiums are apart from homeowners insurance, which the borrower will also have to keep paying each year.
In the case of a HUD-backed HECM, you'll need to be able to show proof of adequate financial resources to pay these costs in order to qualify.
Only the lump sum (single disbursement) reverse mortgage, which gives you all of the proceeds at once when your loan closes, has a fixed interest rate. The other five options have adjustable interest rates, which can change over time.
Adjustable or variable-rate reverse mortgages are tied to a benchmark index, often the Secured Overnight Financing Rate (SOFR).
On top of the benchmark rate, the lender will add a margin of one to three percentage points, but no more than five. So, for example, if the index rate is 5% and the lender's margin is 2%, your reverse mortgage's interest rate will be 7%. Unlike a regular mortgage, your credit score does not affect your reverse mortgage interest rate or your ability to qualify (though it does affect whether the lender may require a Life Expectancy Set Aside account to cover your property taxes, homeowners insurance, and related expenses).
Interest rates can vary from lender to lender (the government doesn't set rates) so it's worth shopping around for the best reverse mortgage companies and not go with the first lender you encounter.
The proceeds that you'll receive from a reverse mortgage will depend on the lender and your payment plan. For a HECM, the amount that you can borrow will be based on the youngest borrower's age, the loan's interest rate, and the lesser of your home's appraised value or the FHA's maximum claim amount, which is $1,149,825 in 2024.
However, you can't borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loan's expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
Unfortunately, reverse mortgage scams abound. For example, unscrupulous home improvement contractors may try to persuade homeowners to sign up for reverse mortgages to pay for improvements or repairs. The contractor may or may not actually deliver on the promised work; often they will just take the money and run.
Other people—including relatives, caregivers, and financial advisors—have been known to take advantage of homeowners in a variety of ways. For example they may persuade the homeowner to give them a power of attorney, use it to apply for a reverse mortgage, and then steal the proceeds. Or, they may talk a homeowner into taking out a reverse mortgage to buy a high-priced financial product, such as an annuity or a whole life insurance policy.
Another danger associated with a reverse mortgage is the possibility of foreclosure. Even though the borrower isn't responsible for making any mortgage payments—and therefore can't become delinquent on them—a reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions can allow the lender to foreclose.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, the lender may not be able to recoup its money when the time comes to sell.
Reverse mortgage borrowers are also required to stay current on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home. If you don't pay your property taxes, your local tax authority can seize the home. If you don't have homeowners insurance and there's a house fire, for example, the lender's collateral will be damaged.
Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, involve a number of one-time fees and ongoing costs, which can all add up. The most significant of these are origination fees, closing costs, and mortgage insurance premiums. In addition interest will continue to build up until the loan is paid off.
The lender will require the borrower (or their heirs) to repay the reverse mortgage if the borrower does any of these things:
There are some exceptions to these rules for eligible non-borrowing spouses who want to keep living in the home after their borrowing spouse passes away.
Your loan balance could grow higher than your home's market value, but lenders can't go after borrowers or their heirs if the home turns out to be underwater when the loan is due. The mortgage insurance premiums that borrowers pay go into a fund that covers lenders' losses when this happens.
Yes, you can refinance a reverse mortgage. However, because of the substantial upfront costs, refinancing a reverse mortgage should be reserved for situations where a spouse needs to be added to the loan, more equity is needed, or the interest rate can be lowered substantially.
Reverse mortgage proceeds are not taxable. While they might seem like income to the homeowner, the Internal Revenue Service (IRS) considers the money to be a loan advance.
No, reverse mortgages cannot be transferred to or taken over by anyone other than the original borrower or borrowers on the loan agreement. Someone who inherits the home might, however, be able to take out their own reverse mortgage after paying off the original reverse mortgage if they meet all the eligibility requirements.
A reverse mortgage can be a helpful financial tool for some homeowners age 62 and over. Ideally, anyone interested in a reverse mortgage will take the time to learn how these loans work and pay close attention during their required mortgage counseling. Reverse mortgages can be complicated and expensive, and rates and terms can vary from one lender to another, so it's worth shopping for the best reverse mortgage companies.