Reverse mortgages: a practical guide

A loan against equity, not free money

A reverse mortgage is a loan secured by your home. It allows eligible homeowners to access part of their equity without selling immediately. Equity is the home's value minus the debt secured by it. Unlike a traditional mortgage, a reverse mortgage generally does not require monthly principal-and-interest payments while the borrower meets the loan conditions.

Interest and applicable fees are added to the balance when they are not paid. The amount owed therefore grows over time, which can reduce the equity available for a later move or an inheritance. The loan eventually must be repaid, usually when the home is sold, the last borrower dies, or the home stops being a qualifying primary residence. Spouse protections can affect repayment after a borrower's death.

This educational overview was prepared for michaelbrouse.com. It provides general information, not individualized financial, tax, or legal advice.

Sources: FTC: Reverse Mortgages · CFPB: When do I have to pay back a reverse mortgage loan?

HECM, proprietary, and purchase options

A Home Equity Conversion Mortgage, or HECM, is the most common reverse mortgage. It is insured by the Federal Housing Administration, part of HUD, and is available through FHA-approved lenders. HECM borrowers must be at least 62. Available loan proceeds depend on factors including the youngest borrower's or eligible non-borrowing spouse's age, interest rates, and the applicable property value and program limit.

Proprietary reverse mortgages are private loans that are not FHA-insured. Some are called jumbo reverse mortgages because they are designed for higher-value homes. Some private programs may accept borrowers as young as 55, but age rules depend on the lender, product, and state. Age 55 is not a HECM rule or a promise of eligibility. Private loan costs, payout choices, and protections also need separate review.

HECM for Purchase is a use of the HECM program, not a separate category of federal insurance. It combines HECM proceeds with the buyer's funds to purchase a new primary residence. Some governments and nonprofits also offer single-purpose reverse mortgages for restricted uses, such as repairs or property taxes. These programs are not available everywhere.

Sources: HUD: Home Equity Conversion Mortgages for Seniors · CFPB: Are there different types of reverse mortgages? · Finance of America: HomeSafe product age and state restrictions · CFPB: Can I use a reverse mortgage loan to buy a home?

Eligibility involves more than age

For a HECM on an existing home, you must live there as your primary residence and own it outright or have sufficient equity. An existing mortgage must be paid off at closing using reverse mortgage proceeds, your own funds, or a combination. A large existing balance can leave little cash available or prevent the transaction from working. An online estimate is not an approval.

The lender conducts a financial assessment to evaluate whether you can meet continuing obligations. Having substantial equity does not replace the need to afford taxes, insurance, upkeep, and other property charges. Depending on the assessment, some proceeds may have to be reserved in a set-aside for future property charges. That reduces the funds available for other uses.

HUD-approved reverse mortgage counseling is required for a HECM. Counseling covers eligibility, costs, financial consequences, and alternatives; it does not guarantee lender approval. Federal debt issues must also be resolved under program requirements. The property must meet applicable standards. Its condition, property type, and appraisal matter, and required repairs can affect approval. Not every home qualifies, including some manufactured homes and cooperative units for HECM for Purchase.

Sources: CFPB: Can anyone take out a reverse mortgage loan? · CFPB: Reverse mortgages — A discussion guide · CFPB: Can I use a reverse mortgage loan to buy a home?

How proceeds are received matters

Depending on the product, proceeds may be available as a lump sum, a line of credit, monthly disbursements, or a combination. Fixed-rate HECMs generally use a lump sum, while adjustable-rate HECMs can offer more payout choices. Not all choices are available with every loan, and the advertised borrowing amount is not necessarily the cash left after paying existing debt and costs.

Borrowing a larger amount immediately means interest begins accumulating on more debt. A smaller initial withdrawal does not remove the need to plan for later expenses. Comparing payout choices includes considering how long funds may last, whether the rate can change, and what happens if housing or care needs change.

Sources: FTC: Reverse Mortgages · CFPB: Reverse mortgages — A discussion guide

Closing costs and costs over time

Upfront HECM costs can include a lender origination charge, an initial FHA mortgage insurance premium, and third-party closing expenses. Those expenses may include appraisal, title work, inspections, recording, and other transaction charges. Counseling may also involve a fee. HUD-approved agencies must explain charges and cannot charge a counseling fee to someone who cannot afford it.

Some costs can be paid from loan proceeds rather than out of pocket. Financing them is not the same as eliminating them: it reduces usable proceeds and increases the debt on which future charges accrue. Costs vary, so a written, itemized estimate is more useful than a headline promising low or no upfront costs.

Ongoing loan costs include interest, FHA mortgage insurance for a HECM, and any applicable servicing fees. Unpaid charges accumulate in the balance and compound over time. Separate household expenses, including property taxes and homeowners insurance, also continue. Private loans have their own cost structure. Comparing projected balances over several holding periods can reveal costs that are not obvious at closing.

Sources: CFPB: How much does a reverse mortgage loan cost? · FTC: Reverse Mortgages

The responsibilities that continue

A reverse mortgage does not make housing free. Borrowers must keep property taxes and required insurance current, maintain the home, pay applicable association charges, and satisfy occupancy and other loan terms. A set-aside can help pay specified charges, but it does not remove every expense or maintenance duty. The servicer may require written confirmation that the home remains your primary residence.

Failure to meet obligations can make the loan due and can lead to foreclosure. A move or extended healthcare stay may also affect the loan, depending on occupancy rules and whether another borrower or an eligible non-borrowing spouse remains. Other relatives living in the home do not automatically receive the same protections. Spouse and household arrangements need attention before closing, not only after a crisis.

Sources: FTC: Reverse Mortgages · CFPB: When do I have to pay back a reverse mortgage loan? · CFPB: Reverse mortgages — A discussion guide

Potential benefits and important tradeoffs

Potential benefits include access to equity while remaining in a suitable home and relief from a required monthly principal-and-interest payment after an existing mortgage is paid off. HECM insurance also provides important protections, including protection against an eligible shortfall when the home is sold under applicable program rules. These benefits do not guarantee that a loan fits a particular household.

Tradeoffs include upfront expenses, a growing balance, and potentially less equity for future housing, care, or heirs. Taking out substantial funds early can leave fewer resources later. A short expected stay can make upfront costs especially significant. HECM nonrecourse protection is not a guarantee of remaining equity, and private loans should not be assumed to have identical insurance or repayment terms.

The FTC warns about pressure to sign quickly or buy investments, insurance, or contractor services using loan proceeds. A reverse mortgage is not a requirement to purchase an annuity or another financial product. A sales presentation does not replace independent counseling or careful reading of the actual agreement.

Sources: FTC: Reverse Mortgages · CFPB: What happens if I have a reverse mortgage and want to sell my home? · CFPB: Are there different types of reverse mortgages?

Alternatives also have costs and risks

Refinancing an existing traditional mortgage may change its rate or payment, but it involves qualification, closing costs, and a repayment term that can extend into retirement. A home equity loan or home equity line of credit, or HELOC, may offer another way to borrow against equity. These generally require monthly payments and income and credit qualification. They also put the home at risk if repayment obligations are not met.

Selling and downsizing may reduce housing expenses or release equity, but moving and transaction costs matter. Reviewing the household budget or checking local assistance for utilities, repairs, and property taxes may address a smaller funding need without the same borrowing commitment. Availability and eligibility vary. Waiting is another possibility, although future eligibility, rates, and needs are uncertain. No mortgage or alternative is universally the best choice.

Sources: CFPB: Can anyone take out a reverse mortgage loan? · FTC: Reverse Mortgages

Questions for a lender and independent counselor

A useful comparison looks beyond the initial cash available. The lender can explain the actual offer, while an independent counselor can discuss its implications and alternatives. Written answers make differences between offers easier to understand.

• Is this an FHA-insured HECM or a private loan, and which eligibility rules apply?
• After existing debt, fees, and set-asides, how much money is available?
• Which costs are financed, can the rate change, and how does the projected balance grow?
• What must I pay and maintain, and what events can make the loan due?
• What happens to my spouse, other occupants, and heirs if I move or die?
• How would selling, refinancing, a home equity loan, a HELOC, or assistance programs compare?

Sources: CFPB: What should I ask a reverse mortgage counselor? · FTC: Reverse Mortgages