What Is a Reverse Mortgage? How It Works

Imagine you are 65, you own your home outright, and you have lived there for decades. Your Social Security covers the basics, but a new roof, a medical bill, or simply the desire to travel feels out of reach. You have heard the term “reverse mortgage” tossed around, but you are not sure if it is a loan, a trap, or a clever financial tool. At its core, a reverse mortgage is a way to convert part of your home equity into cash, without selling your home or making monthly mortgage payments. It is a specialized loan for homeowners aged 62 and older, and it has become a popular strategy for supplementing retirement income. In this guide, we will break down exactly what is a reverse mortgage, how it works, its costs, its alternatives, and how to decide if it fits your financial life.

The concept is simple on the surface: instead of you paying the lender, the lender pays you. The loan is repaid when you sell the home, move out permanently, or pass away. The remaining equity belongs to you or your heirs. But the details are nuanced, and the fees can be substantial. To truly understand if this tool is right for you, you need to look past the marketing and examine the mechanics, the eligibility rules, and the long-term impact on your estate. Let us start with a clear definition and then explore the practical side of reverse mortgages.

What Is a Reverse Mortgage and How Does It Work?

A reverse mortgage is a loan available to homeowners aged 62 or older that allows them to borrow against the equity in their home. Unlike a traditional forward mortgage, where you make monthly payments to reduce your debt, a reverse mortgage pays you a lump sum, a monthly income stream, or a line of credit. The loan balance grows over time as interest accrues, but you do not have to repay it as long as you live in the home and meet the loan obligations, such as paying property taxes and homeowners insurance.

Here is a quick breakdown of the core mechanics:

• Equity conversion: You are converting a portion of your home’s value into cash, without selling the property.
• No monthly payments: The loan is repaid when the last borrower leaves the home, sells it, or passes away.
• Interest accrues: The loan balance increases each month because interest is added to the principal.
• Non-recourse protection: You or your heirs will never owe more than the home’s value at the time of repayment.
• Government-insured option: Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA).

After that overview, you might wonder who actually qualifies and what the real costs are. Let us dive deeper into the eligibility requirements, because they are stricter than many people assume.

Who Qualifies for a Reverse Mortgage?

Eligibility is not just about age. The home itself must meet certain standards, and you must demonstrate the financial capacity to maintain the property. The most common product, the HECM, has specific rules set by the U.S. Department of Housing and Urban Development (HUD). Below are the key qualifications you need to meet.

Age and Occupancy Requirements

The youngest borrower on the title must be at least 62 years old. If you are married and your spouse is younger than 62, there are special rules that allow the younger spouse to remain in the home after the older borrower passes away, provided the loan is not due and payable. That protection, known as the “non-borrowing spouse” rule, is a crucial detail that can affect long-term planning. You must also live in the home as your primary residence, which means you cannot use a reverse mortgage on a vacation home or an investment property.

Financial Assessment and Property Standards

Lenders will review your credit history, income, and assets to ensure you can still pay property taxes, homeowners insurance, and maintenance. This financial assessment is designed to protect you from foreclosure. The property must also be a single-family home, a 2-4 unit building, an FHA-approved condo, or a manufactured home that meets HUD standards. The home must be in good condition, and a property appraisal is required to determine its current market value.

Beyond those basics, you need to understand that a reverse mortgage is not free money. The fees, interest rates, and insurance premiums can be significant, and they directly affect how much you can borrow. Let us examine the costs in detail.

The Real Costs of a Reverse Mortgage

It is tempting to focus only on the money you receive, but the costs can eat into your equity over time. The biggest expense is the mortgage insurance premium (MIP), which is required on all HECM loans. You pay an upfront MIP of 2% of the home’s value (or the FHA lending limit, whichever is less) at closing, and then an annual MIP of 0.5% of the loan balance. That insurance protects the lender if the home sells for less than the loan balance, and it guarantees you will receive your payments even if the lender goes bankrupt.

Other costs include origination fees (capped by HUD), appraisal fees, title search, recording fees, and third-party closing costs. Most of these can be financed into the loan, meaning you do not pay them out of pocket, but they reduce the amount of equity you have left. Here is a list of the typical fees you should expect:

• Origination fee: Up to $6,000 for homes valued over $125,000, set by the lender.
• Appraisal fee: $300 to $800, paid upfront or financed.
• Closing costs: Includes title insurance, recording, and credit report fees, often $2,000 to $5,000.
• Servicing fee: A monthly fee (usually $30 to $35) to manage the loan.
• Mortgage insurance premium: Upfront 2% plus an annual 0.5% of the loan balance.

Given those costs, a reverse mortgage is rarely a short-term solution. It works best when you plan to stay in the home for at least five years. If you sell within a few years, the fees can consume a large portion of your equity. That is why it is critical to compare the costs against the benefits, and to explore alternatives before you commit.

Types of Reverse Mortgages

Not all reverse mortgages are the same. The most popular is the HECM, but there are also proprietary loans and single-purpose loans. Each has its own advantages and trade-offs, so let us break them down.

Home Equity Conversion Mortgage (HECM)

This is the standard reverse mortgage, insured by the federal government. It offers flexible payment options (lump sum, monthly payments, line of credit, or a combination), and it is available through FHA-approved lenders. The lump sum option is the only one with a fixed interest rate; the other options use an adjustable rate. HECMs are widely used because they offer the most consumer protections, including the non-recourse guarantee.

Proprietary Reverse Mortgages

These are private loans offered by banks or mortgage companies, not insured by the government. They are often used for high-value homes that exceed the FHA lending limit, which is $1,149,825 in 2026. Because they are not government-backed, they can have different eligibility rules (some start at age 60) and may offer larger loan amounts. However, they come with higher interest rates and fewer protections, so they are best suited for borrowers with substantial equity and a clear financial plan.

Single-Purpose Reverse Mortgages

Offered by some state and local government agencies or nonprofits, these loans are restricted to a single purpose, such as paying for home repairs or property taxes. They often have lower costs and income limits, but they are not widely available. For homeowners with modest needs and limited equity, a single-purpose loan can be a low-cost alternative, but you must check what your local agencies offer.

Understanding these types helps you see that a reverse mortgage is not a one-size-fits-all product. The choice depends on your home’s value, your age, and your financial goals. Another critical factor is how you receive the money, because that decision affects your long-term budget.

How Do You Receive the Money?

When you are approved for a reverse mortgage, you choose a payment plan that suits your cash flow needs. The HECM offers five main options:

1. Tenure: Equal monthly payments for as long as you live in the home.
2. Term: Equal monthly payments for a fixed period, such as 10 years.
3. Line of credit: You draw money as needed, and the unused balance grows over time (a unique feature).
4. Modified tenure: A combination of monthly payments plus a line of credit.
5. Modified term: A combination of fixed monthly payments for a set period plus a line of credit.

The line of credit is often praised because it offers flexibility and the ability to tap into equity only when needed. Unused funds grow at the loan’s interest rate, which can provide a growing safety net over time. However, the monthly payment options can be more predictable for budgeting. You should also know that if you choose a lump sum, you will receive a single payment at closing, and the interest rate is fixed. That can be useful for a one-time expense, but it also means the loan balance grows faster from the start.

Once you receive the funds, your obligations do not disappear. You must continue to pay property taxes, homeowners insurance, and maintain the home. The lender will verify this each year, and failing to meet these obligations can trigger a loan default, leading to foreclosure. That is a serious risk, so it is wise to set up automatic payments for those expenses from the proceeds.

Pros and Cons: A Balanced Look

Like any financial product, a reverse mortgage has genuine benefits and real drawbacks. You need to weigh them against your personal situation, not just the marketing promises. Here is a balanced view.

Benefits include the ability to stay in your home while accessing equity, the lack of monthly mortgage payments, and the non-recourse protection that shields your heirs from owing more than the home is worth. The money you receive is generally tax-free, and it does not affect Social Security or Medicare benefits (though it can affect Medicaid eligibility if you do not spend the funds promptly). For many retirees, a reverse mortgage can be a lifeline to cover healthcare costs, home modifications, or unexpected expenses.

Drawbacks include high upfront costs, the growing loan balance that reduces your equity, and the risk of foreclosure if you fail to pay taxes or insurance. A reverse mortgage can also complicate your estate planning, because your heirs might need to sell the home to repay the loan. Additionally, the interest rates are often higher than a traditional mortgage, and the loan is not a good fit if you plan to move in a few years. You should also be aware of scams and predatory lenders, so it is essential to work with a HUD-approved counselor and a reputable lender.

To help you decide, consider this scenario: if you have $300,000 in equity and you take a lump sum of $150,000, the remaining equity is not lost. It stays in the home and can be passed to your heirs. But if the loan balance grows over 10 years to $200,000, your heirs will only receive the difference if they sell the home. That is why the math must be done carefully, and why a reverse mortgage should be viewed as a long-term strategy, not a quick fix.

Reverse Mortgage vs. Alternatives

Before you commit to a reverse mortgage, explore other ways to tap your home equity or generate income. A home equity line of credit (HELOC) or a cash-out refinance might be cheaper if you have enough income to make payments. Selling your home and downsizing is another option, though it means moving. You could also consider a home equity sharing agreement, where an investor gives you cash in exchange for a share of your home’s future value. Each alternative has trade-offs, and the best choice depends on your goals.

For many, the appeal of a reverse mortgage is the absence of monthly payments. A HELOC, by contrast, requires you to make at least the interest payments, and a cash-out refinance replaces your current mortgage with a larger one. If your budget cannot handle those payments, a reverse mortgage might be the only way to access equity without a monthly burden. However, if you can afford payments, a HELOC might be far less expensive in the long run, especially because its interest rates are often lower.

When comparing options, also think about your heirs. A reverse mortgage reduces the inheritance you can leave behind, but it does not eliminate it entirely. In our guide on whether heirs have to pay back a reverse mortgage, we explain that heirs can choose to repay the loan and keep the home, or sell the home and keep any remaining equity. That clarity is important for family discussions. Likewise, if you are planning to sell in the near future, you should read our article on selling a house with a reverse mortgage, because it affects your timing and the payoff process.

Steps to Get a Reverse Mortgage

If you decide that a reverse mortgage aligns with your needs, the process involves several steps. It is not as simple as walking into a bank and signing papers. Here is what you can expect:

1. Complete HUD-approved counseling: You must meet with an independent counselor who explains the loan’s features, costs, and alternatives. This session takes about 90 minutes and costs around $125.
2. Choose a lender: Compare offers from multiple FHA-approved lenders. Look at interest rates, origination fees, and customer reviews.
3. Submit an application: Provide financial documents, such as tax returns, bank statements, and proof of homeowners insurance.
4. Order an appraisal: The lender hires an appraiser to determine your home’s value, which sets the maximum loan amount.
5. Close the loan: Sign the final documents. You have three business days to rescind the loan if you change your mind.

Throughout this process, be wary of high-pressure sales tactics. A legitimate lender will never ask you to pay large upfront fees before you receive counseling. You should also confirm that the lender is FHA-approved. The counseling session is your best defense against misunderstandings, so take it seriously and ask questions about the loan balance, the costs, and the impact on your estate.

Impact on Heirs and Estate Planning

One of the biggest concerns about reverse mortgages is what happens to the home after you pass away. The loan becomes due, and your heirs have options. They can sell the home to repay the loan, and any remaining equity goes to them. They can also refinance the reverse mortgage into a traditional loan, or they can pay off the balance with their own funds. If the loan balance exceeds the home’s value, the FHA insurance covers the difference, and heirs are not responsible for the shortfall. That is a robust protection, but it still means your heirs might not inherit the home free and clear.

To preserve equity for your heirs, you might consider a reverse mortgage for a line of credit only, and use it sparingly. This allows the unused portion to grow, potentially increasing the amount you can pass along. However, the interest on any drawn funds still reduces the net equity. It is wise to discuss your plans with your family and an estate attorney, especially if you have a spouse who is not a borrower. The rules for non-borrowing spouses are complex, and you want to ensure your partner is protected. For more details on the age and spousal rules, check our resource on reverse mortgage age requirements, which covers the 62-year minimum and the exceptions for younger spouses.

Making the Right Decision for Your Future

So, what is a reverse mortgage in the end? It is a flexible, federally insured loan that can provide financial freedom for older homeowners, but it is not a decision to make lightly. The key is to use it as part of a broader retirement plan, not as a last resort. Start by evaluating your cash flow, your health, and your desire to stay in your home. Then, compare the costs against the benefits using a mortgage calculator or by speaking with a trusted financial advisor.

If you are considering a reverse mortgage, you should also shop around. MortgageZone offers tools to compare lender quotes and access to educational resources that simplify the process. We can help you understand the fine print and connect you with lenders who offer competitive terms. The decision will ultimately be yours, but you do not have to make it alone. Use the resources available, talk to a HUD counselor, and make a choice that aligns with your long-term well-being.

In summary, a reverse mortgage can be a powerful way to unlock your home’s equity without selling it, but it comes with significant costs and responsibilities. Whether it is the right move depends on your age, your home’s value, your financial situation, and your plans for the future. By understanding the mechanics, the fees, and the alternatives, you are already ahead of most borrowers. Now, take that knowledge and apply it to your unique circumstances, and you will be well-equipped to make a confident, informed decision.