Reverse Mortgage Guide: How It Works, Costs and Alternatives

A reverse mortgage lets homeowners 62 and older convert home equity into cash without selling or making monthly payments. The loan is repaid when you sell, move out or pass away. The most common type is the HECM (Home Equity Conversion Mortgage), insured by FHA. You can receive funds as a lump sum, monthly payments or line of credit. Closing costs are high (2-6% of home value), and the loan balance grows over time as interest accrues.

How Reverse Mortgages Work

The Basic Concept

Traditional mortgage: You borrow money, make payments, balance decreases

Reverse mortgage: You receive money, make no payments, balance increases

Money Flow

You receive funds through:

• Lump sum payment
• Monthly payments
• Line of credit
• Combination of these

You repay when:

• You sell the home
• You move out
• You pass away
• You fail to meet obligations (taxes, insurance, maintenance)

No Monthly Payments Required

You don’t make mortgage payments. Instead:

• Interest accrues monthly
• Balance grows over time
• Loan is repaid from sale proceeds (eventually)

Types of Reverse Mortgages

HECM (Home Equity Conversion Mortgage)

Most common type - Insured by FHA

Feature	Details
Age requirement	62+
Max loan amount	Based on age, rate, home value
Insurance	FHA-insured
Counseling	Required
Non-recourse	Yes (never owe more than home value)

Proprietary Reverse Mortgages

Private lender products for high-value homes:

• Not FHA-insured
• Higher loan limits
• May have different terms
• Less consumer protection

Single-Purpose Reverse Mortgages

From state/local governments or nonprofits:

• Lowest costs
• Funds restricted to specific use (repairs, taxes)
• Limited availability

How Much Can You Get?

Factors Affecting Amount

Factor	Impact
Age	Older = more available
Home value	Higher = more available
Interest rate	Lower = more available
Existing mortgage	Reduces available amount

Principal Limit Examples

Approximate amounts (vary by current rates):

Age	$400K Home	$600K Home	$800K Home
62	$180,000	$270,000	$360,000
70	$210,000	$315,000	$420,000
80	$260,000	$390,000	$520,000

Note: These are estimates. Actual amounts depend on current interest rates and program specifics.

Existing Mortgage Impact

If you have a mortgage:

• Reverse mortgage must pay it off first
• Remaining amount available to you

Example:

• Principal limit: $250,000
• Existing mortgage: $100,000
• Available to you: $150,000

Payment Options

Lump Sum

Receive all available funds at once.

Best for:

• Paying off existing mortgage
• Major one-time expense
• Immediate need

Consideration: Fixed rate only, may receive less than other options

Monthly Tenure Payments

Fixed monthly payment for as long as you live in the home.

Example:

• Principal limit: $250,000
• Monthly payment: ~$850 (depends on calculations)
• Continues regardless of home value changes

Monthly Term Payments

Fixed monthly payment for a set period.

Example:

• $250,000 over 10 years
• Monthly payment: ~$2,000
• Payments stop after 10 years

Line of Credit

Access funds as needed.

Advantages:

• Only borrow what you need
• Interest only on amount used
• Unused portion grows over time

Growth feature: Unused credit line grows at same rate as loan interest, giving you access to more over time.

Combination

Mix of options:

• Lump sum + line of credit
• Monthly payments + line of credit
• Customize to your needs

Costs of Reverse Mortgages

Upfront Costs

Cost	Typical Amount
Origination fee	Up to $6,000
FHA mortgage insurance (upfront)	2% of home value
Closing costs	2-4% of home value
Counseling	$125-$200

Example on $400,000 home:

• Origination: $4,000
• FHA MIP: $8,000
• Other closing costs: $6,000
• Total: ~$18,000 (4.5%)

Ongoing Costs

Cost	Rate
Interest	Variable or fixed (3-8%)
FHA MIP (annual)	0.5% of loan balance
Servicing fee	$0-$35/month

How Balance Grows

Example: $200,000 borrowed at 6% interest

Year	Loan Balance
Start	$200,000
Year 5	$268,000
Year 10	$358,000
Year 15	$479,000
Year 20	$641,000

Interest compounds, causing balance to grow significantly over time.

Obligations You Must Meet

To Keep the Reverse Mortgage

You must:

• Live in the home as primary residence
• Maintain the property
• Pay property taxes
• Pay homeowners insurance
• Pay HOA fees (if applicable)

Failure to Meet Obligations

If you don’t meet these requirements:

• Loan becomes due
• Could lead to foreclosure
• Even without monthly mortgage payments

Property Tax and Insurance Set-Asides

Some borrowers must have funds set aside:

• For property taxes
• For insurance premiums
• Reduces amount available

When the Loan Becomes Due

Triggering Events

Loan is due when:

• You sell the home
• You move out (no longer primary residence)
• You pass away
• You fail to meet obligations
• Last surviving borrower experiences trigger event

For Non-Borrowing Spouse

If your spouse isn’t on the loan:

• May be able to stay if eligible
• Complex rules apply
• Discuss with counselor before taking loan

Repayment Options

When loan comes due:

• Sell home, pay off loan from proceeds
• Refinance to traditional mortgage
• Pay off with other funds
• Heirs inherit and sell or refinance

Non-Recourse Protection

You (or your heirs) never owe more than:

• The home’s sale value
• Even if loan balance exceeds home value
• FHA insurance covers the difference

Pros and Cons

Advantages

No monthly payments: Free up cash flow in retirement

Stay in your home: Access equity without selling

Flexible payment options: Choose how you receive funds

Non-recourse: Never owe more than home value

Tax-free proceeds: Reverse mortgage funds aren’t taxable income

Social Security/Medicare unaffected: Doesn’t count as income for these programs

Disadvantages

High costs: Significant upfront fees reduce available equity

Growing balance: Loan compounds, eating into home equity

Reduced inheritance: Less equity to leave to heirs

Complexity: Difficult to understand all implications

Obligations continue: Must still pay taxes, insurance, maintain property

Moving restrictions: Must remain in home as primary residence

Is a Reverse Mortgage Right for You?

Good Candidates

• Age 62+, plan to stay in home long-term
• Significant home equity
• Need to supplement retirement income
• Comfortable with declining equity
• No plans to leave home to heirs
• Can afford taxes, insurance, maintenance

Poor Candidates

• Planning to move soon
• Want to leave home to heirs
• Have high-equity home but low income for expenses
• Could benefit more from selling and downsizing
• Other options available (HELOC, family support)

Questions to Ask

1. How long do I plan to stay in this home?
2. Can I afford taxes, insurance and maintenance?
3. What are my other income sources?
4. Do I want to leave the home to heirs?
5. Have I explored all alternatives?

Alternatives to Reverse Mortgages

Downsize

Sell current home, buy smaller/cheaper home:

• Access equity immediately
• Lower ongoing costs
• No growing debt
• Change in living situation

Home Equity Loan or HELOC

Borrow against equity with traditional loan:

• Lower costs than reverse mortgage
• Monthly payments required
• Keep more equity long-term
• Need income to qualify

Cash-Out Refinance

Refinance to larger mortgage:

• Access equity as lump sum
• Monthly payments required
• Need income to qualify
• Keep more equity than reverse

Rent Part of Home

Take in a renter:

• Generate monthly income
• Keep all your equity
• Lifestyle change required

Family Loan or Gift

Borrow from or receive gift from family:

• No interest or low interest
• No fees
• Family dynamics to consider

Government Benefits

Explore programs you may qualify for:

• Property tax relief
• Utility assistance
• Healthcare subsidies
• Veteran benefits

The Reverse Mortgage Process

Step 1: Counseling (Required)

Meet with HUD-approved counselor:

• Discuss your situation
• Review alternatives
• Understand costs and risks
• Receive certificate

Step 2: Choose Lender

Shop multiple lenders:

• Compare interest rates
• Compare costs
• Understand terms
• Check reputation

Step 3: Application

Submit application with:

• Counseling certificate
• Financial information
• Property information

Step 4: Appraisal

Home is appraised to determine:

• Current market value
• Principal limit calculation

Step 5: Underwriting

Lender reviews:

• Age eligibility
• Property eligibility
• Financial assessment
• Ability to meet obligations

Step 6: Closing

Sign documents and receive funds:

• 3-day right of rescission
• Funds disbursed after rescission period

Frequently Asked Questions

Do I still own my home with a reverse mortgage?

Yes. You retain ownership and title. The reverse mortgage is a loan against your equity, not a sale of your home.

Can the bank take my home?

Only if you fail to meet obligations (live there, pay taxes/insurance, maintain property) or when the loan becomes due. As long as you meet requirements, you can stay.

What happens when I die?

Your heirs inherit the home with the reverse mortgage balance. They can sell and pay off the loan, refinance to a traditional mortgage, or let the lender sell the property. They never owe more than the home’s value.

How much can I borrow?

Depends on your age, home value and interest rates. Generally 40-65% of home value. Older borrowers can access more.

Are reverse mortgage proceeds taxable?

No. Reverse mortgage funds are considered loan proceeds, not income, and aren’t taxable.

Can my spouse stay if I pass away?

If your spouse is a co-borrower, yes. If not on the loan, they may be able to stay under certain conditions—consult with your lender and counselor.

What are the upfront costs?

Typically 2-6% of home value, including origination fee, FHA insurance and closing costs. These are usually financed into the loan.