How Reverse Mortgages Work
A reverse mortgage is a loan available to homeowners aged 62 and older that converts a portion of home equity into cash without requiring monthly mortgage payments. Instead of paying the lender each month, the lender pays the borrower, either as a lump sum, a line of credit, fixed monthly payments (tenure), or a combination of these options. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration and regulated by HUD. The loan balance grows over time as interest and fees accrue on the borrowed amount, and repayment is deferred until the borrower sells the home, moves out permanently, or passes away. At that point, the home is typically sold and the proceeds used to repay the loan; if the sale price exceeds the loan balance, the borrower or heirs receive the difference. If the home sells for less than what is owed, the FHA insurance covers the shortfall, protecting both the borrower and their heirs from owing more than the home's value.
HECM Eligibility Requirements
To qualify for a HECM reverse mortgage, the youngest borrower or eligible non-borrowing spouse must be at least 62 years old. The property must be the borrower's primary residence, and eligible property types include single-family homes, two-to-four unit properties (with the borrower occupying one unit), HUD-approved condominiums, and certain manufactured homes built after June 1976 that meet FHA standards. Borrowers must demonstrate the financial ability to maintain property taxes, homeowners insurance, and any applicable HOA dues; a financial assessment determines this capacity. Any existing mortgage must be paid off at or before closing, typically using proceeds from the reverse mortgage itself. HUD requires all prospective borrowers to complete a counseling session with a HUD-approved housing counselor before applying, ensuring they understand the terms, costs, and alternatives. There is no minimum credit score requirement for HECM loans, though the financial assessment may require a "set-aside" from loan proceeds if the borrower has a history of late property charges.
Reverse Mortgage Costs and Fees
Reverse mortgages carry several costs that reduce the net proceeds available to borrowers. The upfront Mortgage Insurance Premium (MIP) is 2% of the lesser of the home's appraised value or the FHA lending limit ($1,149,825 in 2025). On a $350,000 home, that amounts to $7,000. An annual MIP of 0.50% of the outstanding loan balance accrues each year and is added to the loan balance. Origination fees are capped at $6,000: lenders may charge $2,500 or 2% of the first $200,000 of the home's value plus 1% of the amount over $200,000, whichever is greater, with the $6,000 ceiling. Third-party closing costs, including appraisal fees ($400-$600), title insurance, recording fees, and surveys, typically add $2,000 to $5,000. Ongoing servicing fees of up to $35 per month may apply. All of these costs can be financed into the loan rather than paid out of pocket, though doing so reduces the available proceeds. According to AARP, borrowers should carefully weigh these costs against the benefits, particularly if they plan to stay in the home for only a few years.
Payment Options Explained
HECM borrowers can choose from five payment plans or combine certain options. The Tenure plan provides equal monthly payments for as long as at least one borrower lives in the home as a primary residence, effectively creating a lifetime income stream. The Term plan delivers equal monthly payments for a fixed period chosen by the borrower. The Line of Credit option establishes a pool of funds that the borrower can draw from as needed, with the unused portion growing over time at the same rate as the loan balance, regardless of changes in home value. The Modified Tenure plan combines a line of credit with reduced monthly tenure payments. The Modified Term plan combines a line of credit with payments for a fixed period. The single lump-sum disbursement is available only with a fixed-rate HECM and provides all funds at closing. Most financial advisors recommend the line of credit option for its flexibility and the unique growth feature, which can significantly increase available funds over time. Borrowers can switch between adjustable-rate payment plans for a small administrative fee, but the fixed-rate option is a one-time, lump-sum-only choice.
Pros and Cons of Reverse Mortgages
Reverse mortgages offer meaningful advantages for retirees with substantial home equity but limited liquid assets. The primary benefit is supplemental income without monthly mortgage payments, property tax obligations excepted. Borrowers retain full homeownership and can stay in the home indefinitely, provided they maintain property charges and residency. The non-recourse feature means neither borrowers nor heirs will ever owe more than the home's sale value. Proceeds from a HECM are generally not considered taxable income, though borrowers should consult a tax advisor for their specific situation. On the downside, the compounding loan balance erodes home equity over time, potentially leaving less for heirs. Closing costs are significantly higher than those on a traditional mortgage or HELOC. If a borrower moves to a care facility for more than 12 consecutive months, the loan becomes due and payable. Reverse mortgages are also more complex than traditional financing, and unfortunately, the product has attracted predatory marketing targeting vulnerable seniors. The CFPB's reverse mortgage guide recommends exploring alternatives, including HELOCs, downsizing, or community assistance programs, before committing to a reverse mortgage.