What is a reverse mortgage and how does it work?

While you might have heard of a reverse mortgage, you may not know exactly what it means. To put it simply: Instead of paying the lender, the lender pays you — at least for a time. But before you take out a reverse mortgage, learn more about what it is, how it works, and what you need to watch out for.

What is a reverse mortgage and how does it work? 

With a reverse mortgage, you borrow money against the equity in your home, paying interest on the amount borrowed each month. Usually, you can only use a reverse mortgage if you are 62 or older, and you must live in the home as your primary residence and keep up with all taxes and home maintenance. 

Reverse mortgages are similar to regular mortgages in that both use your home as collateral. But unlike traditional mortgages, you receive funds up front or in monthly payments with a reverse mortgage, and you don’t need to repay until you die, move out, or sell the home.

Some people use reverse mortgages to pay for home repairs, property taxes, or even a new home. However, reverse home loans like these accrue interest on what you borrow every month, so your balance goes up over time and your equity decreases.

Types of reverse mortgages

There are several different types of reverse home mortgages, each with their own features and requirements. 

Home Equity Conversion Mortgage (HECM)

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). A HECM is a government-backed home loan insured by the U.S. Department of Housing and Urban Development (HUD). You can use the proceeds from a HECM for anything you need, and there’s no income requirement. You have to be 62 or older to qualify for a HECM.

Single-purpose reverse mortgage

A single-purpose reverse mortgage can be used for only one purpose, as designated by the lender or creator of the loan (such as home repairs, for example). These are typically low-cost loan programs, so there may be an income limit or other restrictions you must meet. 

Because these types of reverse home loans are often offered by government agencies or nonprofits, it’s worth calling your local agency on aging to see what’s available.

Proprietary reverse mortgage

This kind of reverse mortgage is called proprietary because it’s designed and offered by private lenders. It’s not government-backed and could come with a higher interest rate. 

How do you qualify for a reverse mortgage?

Qualifying for a reverse mortgage usually requires you to: 

• Own the home: You must own the home you’re mortgaging, either free and clear or with a significant portion of the existing mortgage paid off.
• Be age 62 or older: For a HECM, you must be at least 62.
• Live in the home as your primary residence: You can’t use a reverse mortgage for second homes or vacation homes.
• Live in an eligible home: Typically, the home must be a single-family residence, condo, or owner-occupied two-, three-, or four-unit home. Mobile homes are typically not eligible.
• Be approved by the lender: You’ll need to fill out an application and be approved for the reverse mortgage.
• Have sufficient funds for related expenses: You’ll need to have income or savings enough to cover your property taxes and upkeep of the home.
• Be free of unpaid federal debt: For HECMs in particular, you won’t be eligible if you have outstanding federal debt, such as owing back taxes.
• Complete a mortgage counseling program: You may need to speak to a mortgage counselor before you can be eligible for a reverse home loan.

How much will a reverse mortgage cost? 

When you take out a reverse mortgage, you’ll have to repay the amount you borrowed, which is called the principal. How much you can borrow will depend on your age, as well as your home’s value and the interest rate you qualify for. You’ll also have to pay interest, which grows over time with a reverse mortgage.

In addition to interest, there are some other costs associated with a reverse mortgage:

• Origination fee: This fee is your lender’s charge for processing your loan application. It’s limited to no more than $6,000.
• Mortgage insurance premiums: For a reverse mortgage, you’ll pay an upfront mortgage insurance premium when you close on the loan and an annual mortgage insurance premium of 0.5% of the balance.
• Closing costs: As with other types of mortgages, you’ll need to pay closing costs, which you can either pay upfront or roll into your loan. This typically includes appraisal fees, title search costs, deed recording fees, and other expenses.
• Servicing fees: Some lenders may charge additional fees to cover their costs for servicing the loan, sending you statements, and processing your payments.

Don’t forget, you’ll also need to keep up with property taxes, homeowners insurance payments, and general maintenance and upkeep on the home in addition to the loan costs.

Pros and cons of a reverse mortgage 

Before you decide whether to use a reverse mortgage, you should keep these considerations in mind:

Pros

• Get the funds you need: Reverse mortgages provide a way to get the funds you need, whether it’s to pay down debt, pay off your current mortgage, cover living expenses, or pay medical bills.
• Leverage your home’s increased value: If the value of your home has substantially increased, a reverse mortgage is one way to access your equity while living in the home.

Cons

• A costly way to cover your expenses: You’ll need to repay the principal, pay fees and interest, keep up with property taxes and insurance, and pay to maintain the home, too. 
• Must meet age requirements: You can’t use a reverse mortgage if you don’t meet the lender’s age requirements.
• Must own the home: You’ll need to own the home outright or have much of your mortgage paid down to use this option.
• May affect benefits: A reverse mortgage could affect your Medicaid or public assistance benefits.
• Can affect your heirs: You’ll typically have to sell the home to repay a reverse mortgage, meaning you can’t pass the home to your survivors after your death.

Alternatives to a reverse mortgage

A reverse mortgage isn’t for everyone. Consider whether a different solution would be more appropriate for your needs:

• Refinancing: Refinancing can decrease your monthly payment, leaving more money available for other purchases. 
• Home equity loan: A home equity loan or a home equity line of credit both let you use your home as collateral to borrow the money you need.
• Downsizing: You can use the proceeds from the sale of your current home as a down payment on a smaller, less expensive home, which can reduce your housing payments.

Reverse mortgage FAQ

Can you sell a house with a reverse mortgage on it?

If you sell the home, the proceeds must first go toward paying off the reverse mortgage, along with unpaid fees and interest. You can keep any money that’s left over. If there is a balance remaining on the mortgage and it is a HECM, then mortgage insurance covers the difference (assuming you sell the home for the appraised value).

How do you pay back a reverse mortgage?

You don’t have to make payments on a reverse mortgage if you don’t want to, though interest will steadily accrue. Instead, you usually pay back the mortgage by selling the home and using the proceeds to repay the loan. However, the loan may come due earlier if you move out, miss property tax payments, or let the home fall into disrepair.

How long does a reverse mortgage last?

A reverse mortgage can last until your death (or the death of a surviving co-borrower). When you die, the loan must be repaid; your heirs typically get 30 days to repay the loan in full if they want to keep it. In some cases, though, your heirs might be allowed up to six months to obtain financing to keep the home, according to the Consumer Financial Protection Bureau.

What is the most common way to repay a reverse mortgage?

The most common way to pay back a reverse mortgage is by selling the home. This usually happens when you move out, such as to another home or nursing facility, or when you die. If you’re married, there are guidelines for what happens if your spouse stays in the home after you die or move out.

Who owns the house after a reverse mortgage?

When you borrow money with a reverse mortgage, you keep the title to the home. However, if you sell the house to repay the mortgage, as is common with this type of loan, then the buyer will be the new owner of the home. If you want the home to stay with your heirs, they’ll need to repay the reverse mortgage.