A reverse mortgage lets homeowners age 62 or older borrow against their home equity without making monthly mortgage payments. Instead of you paying the lender each month, the lender pays you, and the loan balance grows over time as interest and fees accumulate. You don’t repay anything until you sell the home, move out, or pass away. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration.
Who Qualifies
The youngest borrower on a HECM loan must be at least 62. You need to either own your home outright or have substantial equity in it, typically around 50% or more. The exact amount you can borrow depends on your age, current interest rates, and the home’s appraised value. Older borrowers with more equity generally qualify for larger payouts.
Your home must be your primary residence, meaning where you live for the majority of the year. Eligible property types include single-family homes, FHA-approved condos, and two-to-four-unit properties as long as you occupy one unit. Manufactured homes may qualify if they were built after June 15, 1976, sit on a permanent foundation, and meet FHA standards. You also need to stay current on property taxes, homeowners insurance, and basic home maintenance throughout the life of the loan.
How You Receive the Money
One of the biggest decisions with a reverse mortgage is how you take your funds. Each option carries different cost and flexibility tradeoffs.
Line of Credit
You draw money as needed, up to your approved limit. This is often the least expensive option because you only pay interest on what you’ve actually withdrawn. A key feature is the credit line growth: whatever portion you leave untouched grows over time, giving you access to a larger pool of funds later. The line of credit uses an adjustable interest rate and can be combined with monthly payouts.
Monthly Payouts
You receive a set amount each month, which works well for supplementing retirement income. There are two versions. A “term” plan pays you fixed monthly amounts for a set number of years that you choose. A “tenure” plan pays you fixed monthly amounts for as long as you live in the home and maintain the loan, as long as the balance doesn’t exceed the mortgage limit. Like the line of credit, monthly payouts carry an adjustable interest rate and cost less over time than taking everything at once.
Lump Sum
You withdraw all available funds at closing. This is the only option that comes with a fixed interest rate, which appeals to borrowers who want predictability. The downside is significant: because you’re paying interest on the entire loan balance from day one, the total cost is higher than the other options. The available amount may also be smaller compared to what you could access through a line of credit over time. For younger borrowers especially, a lump sum carries the risk of outliving the funds with no remaining equity to tap.
Costs and Fees
Reverse mortgages are not cheap. The fees are similar to a traditional mortgage but with an added layer of government insurance premiums.
The upfront mortgage insurance premium is 2% of your home’s appraised value, due at closing. On a $400,000 home, that’s $8,000. On top of that, you’ll pay an annual mortgage insurance premium of 0.5% of the outstanding loan balance each year for the life of the loan. This annual charge gets added to your balance rather than billed separately, so it compounds over time.
Lenders also charge an origination fee. The cap is the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of any amount above $200,000, with an overall maximum of $6,000. So on a $300,000 home, the origination fee would be $5,000 (2% of $200,000 plus 1% of $100,000). You’ll also encounter standard closing costs like appraisal fees, title insurance, and recording fees. Many borrowers roll all of these costs into the loan balance rather than paying them out of pocket, but that means those fees also accrue interest for the life of the loan.
How the Loan Balance Grows
This is the part that catches many people off guard. Because you’re not making monthly payments, every dollar of interest and every fee gets added to what you owe. The loan compounds: you pay interest on prior interest. A borrower who takes a $150,000 lump sum at a 6% rate would owe roughly $268,000 after ten years, even without touching another dime. With a line of credit or monthly payouts, the growth is slower because you’re only accruing interest on what you’ve drawn so far. But in every scenario, the equity in your home shrinks over time as the loan balance rises.
When the Loan Comes Due
A reverse mortgage must be repaid when the last surviving borrower or eligible non-borrowing spouse dies, sells the home, or no longer lives in it as a primary residence. Moving into a nursing home, assisted living facility, or other healthcare setting for more than 12 consecutive months counts as leaving the home. At that point, anyone else living in the property would need to pay off the loan or move out, unless they qualify as an eligible non-borrowing spouse.
The loan can also come due early if you fail to keep up with property taxes, homeowners insurance, or necessary home repairs. These are ongoing obligations for the life of the loan, and falling behind on them is one of the most common ways borrowers run into trouble with a reverse mortgage.
What Happens for Your Heirs
When the loan becomes due, typically after the borrower passes away, heirs have a few choices. They can sell the home and use the proceeds to repay the loan, keeping any remaining equity. They can refinance the reverse mortgage into a traditional mortgage if they want to keep the property. Or they can simply hand the home over to the lender.
The critical protection here is the non-recourse clause. Most reverse mortgages guarantee that neither you nor your estate can owe more than the home’s value at the time it’s sold. If the loan balance has grown to $350,000 but the home only sells for $300,000, the FHA insurance covers the $50,000 gap. Your heirs won’t be on the hook for the difference. On the other hand, if the home is worth more than the loan balance, your heirs keep the surplus after paying off the debt.
Who a Reverse Mortgage Works Best For
Reverse mortgages tend to make the most sense for homeowners who are cash-poor but equity-rich, plan to stay in their home for many years, and don’t have a strong desire to leave the home’s full value to heirs. A borrower who needs to cover healthcare costs, eliminate an existing mortgage payment, or supplement a fixed income without selling the house can benefit meaningfully.
The math works less well for someone who might move within a few years, since the upfront costs are substantial and you’d have less time to benefit from the payments. It also gets more expensive the younger you are at closing, because the loan has more years to compound. Taking the line of credit and drawing conservatively is one way to control costs, while a lump sum at 62 is one of the most expensive ways to use the product.