Reverse Mortgage Explained: What Homeowners Need

Many older homeowners find themselves in a situation where their home is their most valuable asset, yet they struggle with monthly cash flow. A reverse mortgage can feel like a financial lifeline, but the product is often misunderstood. At its core, a reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into tax-free cash without selling the house or making monthly mortgage payments. Instead of you paying the lender, the lender pays you. This concept sounds simple, but the rules, costs, and long-term implications require careful attention. This article provides a thorough reverse mortgage explained breakdown so you can decide if this financial tool fits your retirement strategy.

How a Reverse Mortgage Actually Works

A reverse mortgage is a loan against your home that you do not have to repay for as long as you live in the property. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). Unlike a traditional forward mortgage where your monthly payments reduce your debt, a reverse mortgage increases your loan balance over time as interest and fees are added. You retain the title to your home, and the lender places a lien on the property.

The money you receive can be structured in several ways: a lump sum, a line of credit, monthly payments (for a fixed term or for life), or a combination of these. The amount you qualify for depends on three major factors: the age of the youngest borrower (or eligible non-borrowing spouse), the current interest rate, and the appraised value of your home (capped at the FHA lending limit, which is $1,149,825 for 2026 in most areas). Generally, older borrowers and higher home values result in larger loan proceeds.

You must repay the loan when the last borrower dies, sells the home, or moves out permanently (such as into a nursing home for more than 12 consecutive months). At that point, the loan balance (principal plus accrued interest and fees) becomes due. Heirs can either pay off the loan (usually by selling the home or refinancing) or deed the property to the lender. Importantly, because HECM loans are non-recourse, you or your heirs will never owe more than the home’s appraised value at the time of sale. Any remaining equity after the loan is paid off goes to you or your estate.

Key Requirements for Borrowers

Not everyone qualifies for a reverse mortgage. The eligibility rules are designed to protect both the borrower and the lender. Before you apply, you must meet these core criteria:

• Age Requirement: All borrowers listed on the title must be at least 62 years old. There are special rules for younger spouses who are not borrowers. For a detailed breakdown of age rules, see our guide on the reverse mortgage age requirement.
• Homeownership: You must own your home outright or have a very low mortgage balance that can be paid off with proceeds from the reverse mortgage. The property must be your primary residence.
• Property Type: Eligible properties include single-family homes, FHA-approved condominiums, and manufactured homes that meet FHA standards. Co-ops and mobile homes are typically excluded.
• Financial Assessment: Lenders must verify that you have the financial capacity to continue paying property taxes, homeowners insurance, and maintenance costs. This is called a financial assessment, and it is mandatory.
• Counseling: You must complete a counseling session with a HUD-approved counselor. This session ensures you understand the loan terms, costs, and alternatives.

Meeting these requirements is only the first step. The financial assessment can disqualify borrowers who have a history of unpaid property taxes or significant credit issues. The goal of this assessment is to prevent foreclosure due to non-payment of taxes or insurance, which is a leading cause of reverse mortgage defaults.

The Costs You Need to Know About

Reverse mortgages are more expensive than traditional mortgages in terms of upfront fees. Understanding these costs is essential for making an informed decision. The major expenses include an origination fee (capped by the FHA at $6,000), a mortgage insurance premium (2% of the appraised value upfront, plus 0.5% annually), appraisal fees, and closing costs. These fees can total 3% to 8% of the home’s value, which is significantly higher than a typical refinance or home equity loan.

Because these costs are financed into the loan (you do not pay them out of pocket), they immediately increase your loan balance. This means you start with negative equity on day one. For example, if you borrow $100,000, you might actually receive only $92,000 after fees and insurance. The remaining $8,000 is added to your loan balance. Over time, interest compounds on the entire balance, including those upfront costs.

There are also ongoing costs. The annual mortgage insurance premium (MIP) is charged monthly and added to your loan balance. While you do not make monthly payments, the MIP accumulates. This insurance protects you (the borrower) by ensuring that if the lender fails to make payments, the FHA will step in. It also guarantees that you will never owe more than the home’s value at repayment. For many borrowers, this non-recourse feature is worth the cost.

Pros and Cons of a Reverse Mortgage

Like any financial product, a reverse mortgage has distinct advantages and disadvantages. Weighing these against your personal situation is critical.

Advantages: The most compelling benefit is the elimination of monthly mortgage payments. This can free up hundreds or thousands of dollars each month for healthcare, living expenses, or travel. The proceeds are tax-free (since they are loan proceeds, not income), which does not affect your Social Security or Medicare benefits. You retain ownership of your home, and you can never be forced to move as long as you meet the loan obligations (paying taxes, insurance, and maintaining the home). The line of credit option is particularly attractive because it grows over time, providing a safety net for unexpected expenses.

Disadvantages: The costs are high, as discussed. Your equity decreases over time, which means you leave less inheritance for your heirs. If you or your spouse need to move to a care facility, the loan becomes due after 12 months. This can force a sale of the home at an inopportune time. Additionally, the financial assessment can be a barrier for those with poor credit or irregular income. Finally, if you fail to pay property taxes or homeowners insurance, the lender can foreclose. This is a real risk, and it is why counseling is mandatory.

Alternatives to Consider Before Borrowing

A reverse mortgage is not the only way to tap home equity. Before committing to this expensive product, explore these alternatives. A home equity loan or a home equity line of credit (HELOC) allows you to borrow against equity while retaining the ability to make interest-only payments. These options have lower upfront costs, but they require you to have sufficient income to make monthly payments. For homeowners who are still working or have solid retirement income, a HELOC may be a better choice.

Another option is a cash-out refinance, where you replace your existing mortgage with a larger loan and take the difference in cash. This makes sense if current interest rates are lower than your existing rate. Downsizing is also a powerful strategy. Selling your current home and buying a smaller, less expensive property can unlock significant cash without taking on debt. Finally, consider a sale-leaseback arrangement, where you sell your home to an investor and then rent it back. This provides cash and eliminates maintenance responsibilities, though it sacrifices ownership.

Each alternative has trade-offs. For a comprehensive overview of how a reverse mortgage compares to other options, review our reverse mortgage guide which walks through these scenarios step by step.

What Happens to Your Heirs

One of the biggest concerns for reverse mortgage borrowers is what happens to their heirs. The short answer is that heirs have options, and the non-recourse feature protects them from owing more than the home is worth. When the last borrower dies, the lender sends a notice to the heirs stating the loan balance. The heirs then have 30 days (with possible extensions up to one year) to decide what to do.

Heirs can choose to pay off the loan (usually by selling the home or refinancing it into a traditional mortgage) and keep any remaining equity. If the home is worth $400,000 and the loan balance is $250,000, the heirs receive $150,000. Alternatively, if the loan balance exceeds the home’s value (which can happen after years of interest accrual), the heirs can simply walk away. They deed the property to the lender, and the FHA insurance covers the loss. The heirs are not personally liable for the shortfall, and it does not affect their credit.

This non-recourse protection is a major selling point. However, it can create complications if multiple heirs are involved and some want to keep the home while others want to sell. Clear communication and estate planning are essential. Many families benefit from discussing the reverse mortgage with an estate attorney before the loan is taken out.

When a Reverse Mortgage Makes Sense

A reverse mortgage is not for everyone, but it can be an excellent tool in specific situations. It works best for homeowners who plan to stay in their home for at least five to ten years. The high upfront costs need time to be offset by the benefit of no monthly payments. If you plan to move in two years, the fees will eat up most of your equity, making it a poor choice.

It also makes sense for retirees who are house-rich but cash-poor. If your home is paid off (or nearly paid off) and you are struggling to cover monthly expenses, a reverse mortgage can provide steady income or a safety net. The line of credit option is particularly valuable for those who want to delay taking Social Security or who face large, unpredictable medical bills. Additionally, for married couples where one spouse is younger than 62, the HECM has rules that protect the younger spouse (non-borrowing spouse) so they can remain in the home after the borrowing spouse dies, as long as they meet certain conditions.

Ultimately, a reverse mortgage is a loan of last resort for many, but a strategic tool for others. If you are considering selling your home to access equity, a reverse mortgage might allow you to stay put. For a complete walkthrough of the process, including how to sell a home that has a reverse mortgage, read our article on selling a house with a reverse mortgage.

Deciding whether to pursue a reverse mortgage requires careful analysis of your financial situation, your health, and your long-term goals. The mandatory counseling session is a good place to ask tough questions. Work with a reputable lender, compare offers, and never feel pressured to sign quickly. This reverse mortgage explained guide is a starting point. Your next step should be a conversation with a financial advisor who specializes in retirement planning. With the right information, you can use your home equity to create a more secure and comfortable retirement.