Reverse Mortgage Guide: Types, Costs, and Requirements

What Is a Reverse Mortgage?

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.

How a Reverse Mortgage Works

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.

Types of Reverse Mortgages

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:

1. Lump sum. In this case you receive all of the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
2. Equal monthly payments (annuity). For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
3. Term payments. The lender gives the borrower equal monthly payments for a set period of the borrower's choosing, such as 10 years.
4. Line of credit. Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts they actually borrow.
5. Equal monthly payments plus a line of credit. The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
6. Term payments plus a line of credit. Here the lender gives the borrower equal monthly payments for a set period, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.

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.

Who Is a Reverse Mortgage Right For?

Reverse mortgages can be expensive, and they aren't right for everyone. However they can sometimes be a solution for homeowners who:

• Want to remain in their current homes
• Need money for everyday living expenses or other important purposes
• Have few (or no) other assets to draw on, such as retirement accounts
• Wouldn't qualify for any other sort of loan because of income or credit requirements

Requirements for Obtaining a Reverse Mortgage

The government has a number of rules regarding eligibility for reverse mortgages and the borrower's responsibilities once they have obtained one.

Property Type

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.

Age, Equity, and Fees

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.

Counseling

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.

Collateral Protection

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.

The Costs of a Reverse Mortgage

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.

Reverse Mortgage Interest Rates

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 Constant Maturity Treasury (CMT) index.

On top of the benchmark rate, the lender will add a margin of one to three percentage points. 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.

How Much Can You Borrow with a Reverse Mortgage?

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:

• As mentioned, the size of the loan will be based, in part, on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
• The lower the interest rate, the more you will be able to borrow. The higher the rate, the less you can borrow.
• The higher your property's appraised value, the more you can borrow.
• The stronger your financial position, the more money you may receive because the lender won't withhold part of it to pay property taxes and homeowners insurance on your behalf.

Beware of Reverse Mortgage Scams

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.

How to Avoid Reverse Mortgage Foreclosure

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.

The Bottom Line

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.