What a reverse mortgage is

A reverse mortgage is a loan that lets you borrow against the value of your home if you're 62 or older. Instead of making monthly payments to a lender, the lender makes payments to you—either as a lump sum, regular monthly checks, or a line of credit you can draw from. The loan doesn't come due until you move out, sell the home, or pass away, at which point your heirs or the lender recover the money from the home's sale.

The catch is that interest and fees accumulate over time, and you remain responsible for property taxes, insurance, and maintenance. If you live a long time, the debt can grow to equal or exceed your home's value, leaving little or nothing for your heirs. For some older adults with limited income and substantial home equity, this trade-off makes sense. For others, it's a costly way to access money that could come from other sources.

Key Takeaways

  • A reverse mortgage converts home equity into cash without requiring monthly payments, but interest and fees accumulate and the full debt comes due when you move, sell, or die.
  • The most common type is a Home Equity Conversion Mortgage (HECM), which is federally insured and requires you to attend a counseling session before you can proceed.
  • Costs include origination fees, insurance premiums, appraisal fees, and closing costs that typically range from 2 to 5 percent of your home's value, plus ongoing interest.
  • You must live in the home as your primary residence, be at least 62 years old, own the home outright or have a small mortgage balance, and have sufficient equity to borrow against.
  • A reverse mortgage can reduce your may be able to access for means-tested programs like Medicaid or Supplemental Security Income if the funds push your assets above the limit.

The three ways to receive money

A reverse mortgage lender offers three payout structures. A lump sum gives you all the money at once—useful if you have an when ready expense, but it also means all the interest starts accruing when ready on the full amount. A term payment sends you a fixed monthly amount for a set number of years you choose. A line of credit lets you draw money as you need it, and interest only accrues on the amount you've actually borrowed, making it the cheapest option if you don't need all the money right away.

Many people choose the line of credit because it gives them flexibility and keeps interest costs lower. However, if you're in financial crisis and need money now, the lump sum or term payment might be your only realistic option. The choice depends on your when ready needs and how long you plan to stay in the home.

How much you can borrow

The amount you can borrow depends on your age, the home's value, current interest rates, and the type of reverse mortgage. Generally, the older you are and the more your home is worth, the more you can borrow. A 62-year-old with a $300,000 home might borrow $100,000 to $150,000, while an 80-year-old in the same home could borrow significantly more because the lender expects to recover the debt sooner.

The federal Home Equity Conversion Mortgage (HECM) program, which insures most reverse mortgages, has limits on how much you can borrow based on your county. These limits change yearly and vary widely by location—from around $766,550 in lower-cost areas to over $1.1 million in high-cost counties. Your lender can tell you the current limit for your area and calculate your specific borrowing amount based on your age and home value.

Costs that reduce what you actually receive

A reverse mortgage is not information programs. You pay an origination fee (typically 1 to 2 percent of the loan amount), an appraisal fee (usually $300 to $500), closing costs similar to a forward mortgage (often $1,500 to $3,000), and mortgage insurance (1 to 1.25 percent of the loan amount upfront, plus 0.5 percent annually). These costs are usually deducted from the money you receive or added to the loan balance.

On top of that, you pay interest on the outstanding balance. Interest rates for reverse mortgages are typically higher than rates for forward mortgages because the lender bears more risk. If you borrow $150,000 at 6 percent interest and live in the home for 15 years without making payments, the debt could grow to $240,000 or more. The longer you stay in the home, the more the debt compounds.

A concrete example: if you borrow $150,000 with $8,000 in upfront costs, you might receive only $142,000 in actual cash. If you take it as a line of credit and draw $50,000 in year one, you're only paying interest on that $50,000 until you draw more. If you take the full amount as a lump sum, interest starts accruing on all $150,000 when ready.

Who can get a reverse mortgage

You must be at least 62 years old, live in the home as your primary residence, and own it outright or have a mortgage balance small enough that the reverse mortgage can pay it off. You also need sufficient equity—typically at least 50 percent of the home's value, though this varies by lender and loan type. If you own the home with a spouse, both of you must meet the age requirement, though only one needs to be 62 if the other is younger.

Before you can close a HECM reverse mortgage (the federal program that covers most of these loans), you must complete a counseling session with a HUD-approved counselor. This counselor is independent of the lender and is required to explain the costs, alternatives, and risks. The counseling is free and can be done in person or over the phone. This step exists specifically to protect borrowers from making a decision they don't fully understand.

What happens to your benefits and taxes

Money from a reverse mortgage is a loan, not income, so it doesn't affect your Social Security or Medicare. However, if you receive Medicaid or Supplemental Security Income (SSI), the funds could disqualify you. These programs have asset limits—typically $2,000 for an individual or $3,000 for a couple—and a lump sum reverse mortgage payment could push you over that limit. If you're on either program, speak with a benefits counselor before taking out a reverse mortgage.

For tax purposes, reverse mortgage interest is not deductible unless you itemize deductions and meet other requirements—and even then, the rules are complex. Consult a tax professional before closing the loan. Additionally, when your home is eventually sold to pay off the reverse mortgage, your heirs may owe capital gains tax on any appreciation in the home's value, though the "step-up in basis" rule often eliminates this for heirs.

Alternatives to consider first

Before taking out a reverse mortgage, explore other options. A home equity line of credit (HELOC) or home equity loan typically has lower interest rates and fees, though it requires monthly payments. A personal loan or credit card may work if you need a smaller amount. Downsizing—selling your home and buying or renting something smaller—frees up equity without ongoing debt. Renting out a room or selling a life insurance policy (called a life settlement) can generate income without borrowing.

If you're struggling with bills or medical costs, contact your local Area Agency on Aging or a nonprofit credit counselor to explore grants, information programs, or debt management plans. Many older adults may have access to for property tax relief, utility information, or home repair grants that don't require borrowing. A reverse mortgage should be a last resort after you've genuinely exhausted other options, not the first one you consider.

Frequently Asked Questions

Can I lose my home if I take out a reverse mortgage?

You can't lose the home straightforward because you took out a reverse mortgage, but you can lose it if you stop paying property taxes, homeowners insurance, or maintenance costs. The lender can also foreclose if you move out of the home for more than 12 consecutive months or fail to meet the loan terms. Your heirs inherit the debt, not the home free and clear—they must repay the loan or sell the home to settle it.

What if I want to move or sell the home later?

You can sell the home at any time. The reverse mortgage becomes due when you sell, and the proceeds go first to pay off the loan balance, then to you or your heirs. If your home has appreciated significantly, you may have substantial equity left over. If the home has declined in value and the debt exceeds what it sells for, the federal mortgage insurance on a HECM protects you—you don't owe the difference.

Can my spouse stay in the home if I pass away?

If your spouse is on the loan as a borrower, they can stay in the home and the loan doesn't come due. If they're not a borrower, they have the right to stay but the loan becomes due within a set timeframe (usually six months to a year). Consult with the lender about adding your spouse as a borrower before closing the loan if this is a concern.

How do I know if a reverse mortgage is a scam?

Legitimate reverse mortgages are offered by banks and mortgage companies and require HUD counseling. Red flags include pressure to close quickly, promises of "information programs," offers to pay your counseling fee, or suggestions to use the money to buy investments or pay off credit cards. If a salesperson is pushing you toward a reverse mortgage to fund another product they're selling, walk away and speak with an independent counselor.

Can I refinance a reverse mortgage if rates drop?

Yes, you can refinance into a new reverse mortgage if rates are lower and the savings justify the new closing costs. However, you'll pay origination fees and other costs again, so the rate drop needs to be substantial to make it worthwhile. A loan officer can calculate whether refinancing makes financial sense in your situation.