If you’ve ever wondered, how does a reverse mortgage work, you’re not alone. This misunderstood financial product has helped thousands of older homeowners turn their equity into cash without selling their home or adding a monthly bill. But it’s not magic. There are terms, trade-offs, and yes, potential pitfalls.
MoneyLion makes it easy to explore loan options including those that could help you make smart financial moves later in life. Whether you’re managing debt or supplementing retirement income, you can compare rates, terms, and fees from top providers and find the solution that fits your goals.
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What is a reverse mortgage and how does it work?
A reverse mortgage is essentially a loan that allows homeowners aged 62 or older to convert part of their home equity into cash without having to sell their home or make monthly mortgage payments. Unlike a traditional mortgage, where you make payments to the lender, with a reverse mortgage, the lender pays you.
Once approved, you can receive funds in several ways: as a lump sum, monthly payments, a line of credit, or a combination of these options. The beauty? You don’t have to repay the loan as long as you live in the home and meet the loan obligations.
Let’s keep it real: reverse mortgages aren’t for everyone. The fees can be higher than traditional mortgages, and the interest accrues over time, potentially eating into your home equity. Plus, if you’re planning to leave your home to your heirs, a reverse mortgage might complicate those plans.
Reverse mortgage explained
Say you’re 70 years old and own a home worth $300,000. You owe nothing on it. A lender offers you a senior’s reverse mortgage for 50% of your home’s value, which is about $150,000. You can take it as a lump sum, monthly payments, or a line of credit. Meanwhile, the loan balance (plus interest) grows in the background. You continue to own and live in the home. When you move out or pass on, the home is sold to repay the loan. Anything left over goes to you or your heirs.
How do you pay back a reverse mortgage?
You don’t make monthly payments on a reverse mortgage. Instead, the loan becomes due when you sell the house, move out for more than 12 consecutive months, or pass away.
When the home is sold, the proceeds go toward repaying the loan. If the sale doesn’t cover the full balance, FHA insurance covers the difference for HECM loans. If there’s equity left after repayment, it goes to you or your heirs.
You can also repay the loan early if you choose; there’s no prepayment penalty. Just remember: if you fail to pay property taxes, insurance, or keep the home in good repair, the lender can call the loan due.
Pros and disadvantages of a reverse mortgage
A reverse mortgage can be your financial secret weapon in retirement, but it’s not exactly a free lunch. Know what you’re signing up for before you tap into your home’s value.
| Pros of reverse mortgages | Disadvantages of reverse mortgages |
| No monthly mortgage payments required | High upfront costs and fees |
| Tax-free cash flow for retirement | Growing loan balance can reduce home equity |
| Multiple payout options (lump sum, monthly, line of credit) | Must still maintain home and pay taxes/insurance |
| Remain the homeowner with title to your home | Can impact inheritance for your heirs |
| Non-recourse loan (you’ll never owe more than home’s value) | Potential impact on eligibility for government benefits |
Types of reverse mortgages
Before diving into the specifics, it helps to understand the reverse mortgage basics.There are 3 main types of reverse mortgages, each designed for different needs:
Single-purpose reverse mortgages: Offered by government agencies or nonprofits for specific expenses like home repairs or property taxes. These typically have lower fees but limited uses and availability.
Home equity conversion mortgages (HECMs): The most common type, backed by the FHA. Available to homeowners 62+ through approved lenders. More flexible than single-purpose loans and can be used for almost anything from supplementing income to medical bills. Requires HUD counseling and staying current on property taxes and insurance.
Proprietary or jump reverse mortgages: Private loans from banks or mortgage companies, often for high-value homes exceeding HECM limits. Not government-backed, these allow wealthy homeowners access to more equity. Terms and fees vary widely, so comparison shopping is essential.
Each type has its own advantages depending on your financial situation and goals – know your options before diving in!
Reverse mortgage vs. regular mortgage
With a standard home loan, you borrow money upfront and make monthly payments that gradually reduce your debt and build equity. With a reverse mortgage, YOU receive payments from the lender, and the balance increases over time.
The key difference? Cash flow direction. Traditional mortgages have you sending checks to the lender, while reverse mortgages have the lender sending payments to you. This can be a game-changer for seniors looking to tap into their home’s value without selling.
Don’t be fooled though – reverse mortgages still come with responsibilities. While you’re freed from monthly mortgage payments, you must keep up with property taxes, homeowner’s insurance, and home maintenance. Neglect these, and you could still face foreclosure, just like with a traditional mortgage.
What are the requirements for a reverse mortgage?
To qualify for a seniors reverse mortgage, you’ll need to meet several criteria:
- Be at least 62 years old
- Own your home outright or have a low remaining mortgage balance
- Live in the home as your primary residence
- Have enough equity to qualify (usually 50% or more)
- You may need to participate in HUD-approved counseling
- Be able to pay property taxes, insurance, and ongoing maintenance
Your home also must be a single-family residence, a multi-unit home (with you living in one unit), a HUD-approved condo, or a manufactured home that meets FHA requirements.
How much does it cost to get a reverse mortgage?
Like any mortgage product, a reverse mortgage comes with fees and costs. Here’s what to expect:
- Origination fee: Up to $6,000 depending on your home’s value
- FHA mortgage insurance premium (MIP): 2% upfront and 0.5% annually for HECMs
- Appraisal fee: Typically $300 to $500 to determine home value
- Closing costs: Similar to regular mortgages (title insurance, escrow fees, etc.)
- Servicing fees: Monthly fees charged by the lender for managing the loan (if applicable)
These fees can often be rolled into the loan balance, but that means they’ll accrue interest over time.
How much money can you get from a reverse mortgage?
The amount you can borrow depends on your age, home value, current interest rates, and the type of reverse mortgage. Older borrowers can usually access more equity because they’re expected to hold the loan for a shorter period.
According to HUD, the average HECM borrower receives between 40% to 60% of their home’s appraised value. For example, if your home is worth $300,000, you might qualify for around $150,000 to $180,000 in loan proceeds. For 2025, the maximum HECM limit is $1,209,750.
How to avoid scams related to reverse mortgages
Scams targeting seniors with reverse mortgages are unfortunately common. To avoid falling for one:
- Only work with HUD-approved lenders
- Avoid offers that promise “free” homes or guaranteed income
- Never sign paperwork you don’t understand or feel pressured into
- Watch out for contractors pushing reverse mortgages to fund home repairs
- Always attend your required counseling session
If something feels off, walk away. Reverse mortgage scams are serious, and once the paperwork is signed, they can be hard to unwind.
Tapping Into Your Home’s Value
A reverse mortgage lets you turn your home equity into cash, stay in your house, and avoid monthly payments. Sounds great on paper but like any financial product, it comes with strings. Fees, long-term costs, and risk to your estate mean this isn’t a decision to rush.
But if used wisely, it can be a powerful tool especially for retirees who want to supplement income or cover big expenses. Just be sure to understand the full picture. Because when it comes to reverse mortgages, clarity beats cash flow every time.
FAQs
Are reverse mortgages a good idea for seniors?
They can be, especially for homeowners with significant equity and limited income. A reverse mortgage can help cover living expenses or medical costs, but it’s important to weigh the long-term impact on your estate and heirs.
How does interest accumulate on a reverse mortgage?
Interest is added to the loan balance monthly, and since you’re not making payments, the total loan grows over time. The longer you hold the loan, the more interest accrues.
Can you lose your home with a reverse mortgage?
Yes, if you fail to pay property taxes, homeowners’ insurance, or maintain the home, the lender can initiate foreclosure even if you’ve met all other terms.
How do you cancel a reverse mortgage using the right of rescission?
For most reverse mortgages, your lender may offer a window for several business days after to cancel the loan without penalty. Make sure to read the fine print and contact your lender for the full details.
What happens to the reverse mortgage if you move away from your home?
If you move out for more than 12 consecutive months, such as into assisted living, the loan becomes due. You or your estate will need to repay the balance, usually by selling the home.
How does a reverse mortgage work when you die?
After the borrower passes away, the loan becomes due. Heirs can choose to repay the loan and keep the home or sell it to repay the balance. Any remaining equity belongs to the heirs.
